Rentokil Initial - H2 2021

Transcript

Andy Ransom (CEO)

Good morning, ladies and gentlemen, and thank you all for joining us today. In a few moments, Stuart will provide you with details of our results for 2021, looking at our five regions where we have again delivered an excellent overall financial performance with revenue, profit, and cash each in excess of our medium-term targets. I'll then come back, and I'll provide an update on the strong performance of our categories last and reiterate the compelling industrial and financial logic of the Terminix transaction before taking questions. To set the scene, let me just say a few words by covering the highlights of 2021. Revenue from ongoing operations increased by 9.8% to just over GBP 3 billion at constant exchange rates, with organic growth excluding disinfection at 7.5%. That's the highest level for many years.

With strong contributions being made in Pest Control of 8.1% and in core Hygiene of 7.4%. Ongoing operating profit grew by 19.5%, reflecting good performances across our regions and with group operating margins increasing by 130 basis points to 15%. Free cash flow of £326.5 million was very strong with a cash conversion rate of 107.3%. We had a cash spend of £463 million on M&A during the year while maintaining our net debt to EBITDA ratio below 2x. A very positive set of financials. We continued to execute our standard operating model with its multiple levers for profitable growth. Just to mention a few examples of our continued good progress here.

We were delighted to welcome 12,000 new recruits to the company who had each applied through our careers portal, and that was from 70,000 applications we received last year, up 52% on the previous year, which given the tight labor markets, we were very pleased with. Our digital pest control services continued to be in strong demand with a 58% increase in PestConnect units, which are now operating at around 13,000 customer sites around the world. It was also particularly pleasing to see our customer retention rate increase by 80 basis points to 85.3% as we continued to deliver very high levels of customer service. Turning now to acquisitions.

2021 was a very strong year for M&A execution, with 48 deals completed in Pest Control and 4 in Hygiene & Wellbeing, with total annualized revenues of GBP 146.6 million being acquired, and so continuing to build our scale and density. We've got a strong deal pipeline in place, and we anticipate spending around GBP 250 million on bolt-on acquisitions this year. Of course, we rounded off a great year with the unique opportunity to bring together our Pest Control operations in North America with Terminix, giving us the opportunity to build density in over 300 towns and cities across the U.S., the world's largest pest control market, and which will generate synergies of over $150 million.

We described the deal as one of compelling industrial and financial logic, and the response that we've had from colleagues and customers in both companies could not have been better. Our integration planning is well underway, and with a strong commitment from both teams, we remain on track to close the deal in the second half. Overall, 2021 was an outstanding year. The group again performed strongly with a combination of excellent organic growth, robust operational performance, and an M&A machine delivering the equivalent of 1 deal every week. With that, let me now hand over to Stuart.

Stuart Ingall-Tombs (CFO)

Thank you, Andy, and good morning, everyone. I'll now run through the key financial highlights of what has been an excellent year in a bit more detail. I'll start with the group level numbers, then move through the regions, and finally, the balance sheet, technical guidance, and outlook. Unless I state to the contrary, all of the numbers are at constant rates of exchange. As Andy has just said, we grew ongoing revenue in 2021 by 9.8%, demonstrating strong momentum from our core businesses. The strong profit conversion from the higher revenues has resulted in improved margins across most regions. Additionally, the return of our core service provision has enabled us to fully resume our high-quality service model.

As part of this, we have been able to catch up on service, customer satisfaction, and debt issues that arose during the early onset of the pandemic in 2020. As a result of this very strong operational performance, we've been able to release GBP 20 million of revenue provisions and GBP 12 million of bad debt provisions, which together with the higher revenues just mentioned, have led to an increase in ongoing operating profits of 19.5%. Customer collections have been strong throughout the year, with no material escalation in bad debts or major insolvencies. This has resulted in very strong free cash flow of GBP 326.5 million, representing cash conversion of 107.3% and over 100% for the second consecutive year.

Following the success of our M&A program in 2021 and the resumption of dividend payments, our net debt to EBITDA ratio at December 31 was 1.96 times. Based on a very strong performance in 2021 and our confidence of further progress in the coming year, the board is recommending a dividend, a final dividend of GBP 0.043 to bring the total dividend for 2021 to GBP 0.0639, an increase of 18.1% on the prior year. Looking now at our performance by region, starting with North America. This was our best performing region in 2021 with revenues growing by 14.2%, 8.9% organic excluding disinfection.

Total pest revenues rose by 24.3%, thanks to continued high demand from both commercial and residential customers and resulting in revenue growth of 21% and 31% respectively. You may recall from our interim results in July that H1 revenues were supported by disinfection revenues of GBP 64.3 million, and as expected, these significantly reduced in H2 to just GBP 2.7 million as COVID-related market conditions improved across the region. Ongoing operating profit grew 8.7%, reflecting revenue growth across all businesses, but offset by the unwind of disinfection. Margins were 16.7% in 2021, fully in line with our guidance of 16.5%-17%.

This reflects the incremental return to more normal levels of growth from our core operations together with ongoing cost initiatives and the benefits from our IT-enabled best of breed program. We've also had another excellent year for M&A in North America, acquiring 17 businesses with combined annualized revenues around GBP 72 million in the year prior to purchase. Of course, we announced in December our acquisition of Terminix, which Andy will talk to you about later in the presentation. A few words now on customer retention, inflation, and the labor environment. We've seen little change to termination rates, which remain within normal ranges. We have experienced some inflationary pressures on the cost base, but these increases have substantially been passed on through efficiencies and annual customer price increases in line with normal practice.

Over the last two years, we've regularly updated you on the progress of our IT replatforming in North America, and I'm very pleased to report that this program is now effectively complete. This chart here, I'm sure you will remember it from our previous results presentations, show the implementation plan work streams and the timeline of progress that has been achieved over recent years. Only one bar remains a work in progress, and that relates to recent acquisitions. As we are acquiring new businesses all of the time, integrating them onto our single platform will be an ongoing and continual process. The replatforming is a major step forward for our business in North America, and we remain on track to reach our 18% target by the end of 2022. This next chart gives a little more color on the program.

Our core West, Central, Northeast and Southeast operating regions have now all moved off their respective legacy platforms to a new service planning and customer management system. This consolidation to one operating platform will enable process standardization as well as the deployment of our digital products in sales, productivity and pricing, field service and scheduling optimization, and perhaps most importantly, an enhanced customer service experience. Turning now to the European region. Ongoing revenue rose by 3.9%. That's 4.8% organic excluding disinfection, reflecting a much improved performance in France, Southern Europe and Latin America. Although we've been impacted by ongoing lockdowns, restrictions and colleague absence due to COVID infections, Europe's core categories have performed well, with Pest Control growing strongly and Hygiene and Workwear regaining momentum.

Pest Control revenues grew by 11.8%, while core Hygiene, excluding Disinfection, rose by 4.4%. Ongoing operating profit rose by 9.9%, leading to a 100 basis points improvement in margins to 19.2%. The region acquired 12 businesses in 2021, 7 in Europe and 5 in Latin America, with annualized revenues of around GBP 29 million. Reassuringly, customer insolvencies across Europe and Latin America in 2021 still remain at lower rates than in 2019, despite the withdrawal of government support programs towards the end of the year. Inflationary cost increases, mainly in fuel and paper products in Europe, have been mitigated by annual price increases. In the U.K., our businesses performed very well from Q2 onwards, reflecting progress with the country's vaccination program and subsequent easing of restrictions.

In Ireland, the trajectory of improvement looks similar, but several weeks behind the U.K. In the rest of world, our Nordic, Sub-Sahara and MENAT regions delivered robust performances despite ongoing pandemic-related challenges. However, our Caribbean businesses continue to be impacted by dampened tourist demand. Regional ongoing revenue increased by 10.8%, that's 7.7% organic, with U.K. and Ireland hygiene and rest of world pest growing particularly strongly. Ongoing operating profit increased by 48.2%, reflecting stronger trading, but also supported by the release of revenue and bad debt provisions as a result of improvements in service levels and cash collections. Net operating margins rose by 620 basis points to 24.8% for the year, 220 basis points of which can be attributed to the provision release as just described.

The region completed 9 M&A transactions in 2021, with combined annualized revenues of around GBP 49 million in the year prior to purchase. Despite mixed trading conditions across the region as a whole, bad debt and customers' insolvencies have not increased significantly in 2021, and in the U.K., wage and product inflation have largely been mitigated through service restructures and customer price increases. Looking now at Asia. While 2021 was a much improved performance on 2020, real recovery has been held back by ongoing challenges in Malaysia, Indonesia, Vietnam and Thailand. China has outperformed considerably better, however, benefiting from earlier reopening of the economy. Regional ongoing revenue rose by 5%, 4.7% organic. Ongoing operating profit was largely unchanged on the prior year at GBP 26.8 million, reflecting a GBP 2 million reduction in government support in H2.

Net operating margins declined by 50 basis points to 10.6%. The region acquired 5 pest control businesses in 2021, with annualized revenues in the year prior to purchase of around GBP 3 million. Turning briefly to retention and inflation, the region has seen some impact of bad debts and customer insolvencies in Indonesia, with an associated impact on profit of GBP 1.3 million. For customers trading well, we've made good progress on annual price increases, but less so for those customers experiencing ongoing problems from the pandemic. In the Pacific, despite intermittent lockdowns throughout the year in Australia and New Zealand, our core operations have recovered well in 2021.

Regional ongoing revenue rose 8.7%, at 6.7% organic, excluding disinfection, aided by 10.3% growth in Pest Control, 8.7% growth in Hygiene excluding disinfection, and a 4% increase in our Ambios operations. Regional ongoing profit, ongoing operating profit grew by 9.9%, leading to a 20 basis point improvement in margins to 19.7%. It was a busy year for M&A in the Pacific, with 9 small businesses acquired in the year, 6 in pest and 3 in hygiene, with annualized revenues of around GBP 7 million. We have seen no spikes in customer insolvencies, despite government subsidies being scaled back in 2021. In fact, overall customer retention remained ahead of our expectations.

Overall, our regions performed strongly in 2021, particularly North America, where the completion of the IT re-platforming will lead to a more efficient and effective organization. As I've mentioned, inflationary cost increases, mostly wage inflation, have largely been mitigated through our normal pricing practices and actions. Let me just take a moment to explain the governance and structures we have in place to enable this. The majority of our contract customers are on evergreen rolling contracts, and we process price increases in the anniversary month of the inception of that particular contract. In general, we have no single pricing event in a year when we have to make big decisions about expected inflation. We're making these decisions daily, weekly, and monthly based on the evidence we see in front of us at that time.

We have strengthened our governance in this area, and earlier in 2021, we initiated projects in Asia and Latin America to improve our capability to drive price increases in these markets, and these are yielding promising early results. At this point, we remain confident that we can pass on input cost inflation to our customer base, but clearly we are keeping this under very close review. To conclude, let me say a few words now on cash flow, net debt guidance and outlook. Operating cash flow of GBP 432.3 million was driven by a GBP 57.5 million increase in adjusted operating profit, offset by higher CapEx and one-off items. Continuing free cash flow of GBP 326.5 million was GBP 20.4 million higher than last year, reflecting the increase in operating cash flow previously noted.

Cash interest of GBP 36.4 million was GBP 4.6 million lower than 2020, reflecting our lower cost of debt. Cash tax increased by GBP 4.5 million to GBP 68.9 million, reflecting higher group profit. This resulted in free cash flow delivery of GBP 326.5 million. On the seventh of July, 2021, using our par call option, we repaid early the remaining EUR 175 million outstanding under the EUR 350 million euro bond due on the seventh of October, 2021. This was funded using cash on the balance sheet following the EUR 600 million euro bond issuance in October, 2020.

Cash spend on acquisitions in 2021 was GBP 463.1 million this year, and dividend payments amounted to GBP 138.7 million. These, together with favorable FX and other items of GBP 19.5 million, primarily due to the strengthening of sterling against euro and dollar, have led to an overall increase in net debt of GBP 269.4 million to just under GBP 1.3 billion. Our net debt to EBITDA ratio was 1.96 times at the 31st of December. Liquidity headroom was in excess of GBP 780 million at the 31st of December, including GBP 550 million of undrawn RCF, which matures in August 2025.

On the fourteenth of December, 2021, we announced our acquisition of Terminix, and that we had entered into a committed bridge facility for up to $2.7 billion with Barclays to support the transaction. We replaced this facility on the twenty-fifth of February this year with a $700 million three-year term loan provided by 15 banks and a $2 billion bridge facility provided by eight of these banks. We have also amended, extended, and increased our revolving credit facility to $1 billion. This amendment will take effect either before or when we complete the acquisition of Terminix, expected to be in H2, at which point the maturity of the RCF will be in 2027.

Following our December announcement, S&P reaffirmed our BBB credit rating with a stable outlook. With net debt of GBP 1.3 billion, our balance sheet continues to fully support our capital allocation model of compounding revenue, profit, and cash flow growth. On this slide, we provide some technical guidance to help you with your models in relation to 2022. I'll let you read this in your own time, but drawing your attention to the bottom of the chart, which states that these items obviously exclude any impact of our transaction with Terminix. Before I hand over to Andy, some comments on outlook for the coming year. The business is performing in line with our expectations resulting from organic growth delivery and the flow-through of revenues from our excellent M&A performance in 2021.

Although we will lap strong disinfection revenues in H1, and we'll also have to contend with ongoing macroeconomic and geopolitical uncertainty, we expect the group to deliver good operational financial progress in the coming year. I will leave you with a slide summarizing our key achievements in 2021 and hand back to Andy to continue with the rest of the presentation.

Andy Ransom (CEO)

Thank you, Stuart. Over the next few minutes, I'm gonna take you through an update on the performance of our three business areas over the last 12 months. I'm gonna start with a quick reminder of our standard operating model, the machine, as I call it, and it starts with our people at the top. In 2021, our employer of choice program continued to create real value. Despite the great resignation and undoubted labor market pressures in some countries, we maintained a very good level of colleague retention at around 85%. I mentioned a moment ago that we'd had 70,000 job applications last year, and one of the ways in which we drove this was the launch of a new job sharing tool called Careers Plus, and it maximizes our social media presence. This connected us with about 15,000 of these applications.

We created an additional 500 new training courses. That's bespoke content specifically to meet the needs of our business, and we again delivered record levels of training across the business. In our most recent global all-colleague survey, conducted at the end of last year, we had a 91% response rate, and once again, we recorded outstanding levels of engagement and enablement. In 2021, we also delivered our safest ever year with a world-class lost time accident rate of 0.38, meaning fewer slips, trips, and falls, and of course, reducing the associated impact on our people and on our business. Happy, engaged, well-trained, and safe employees deliver high levels of customer service, and we can see by the 12,000 five-star reviews for Rentokil Initial on Trustpilot, and of course, the increased customer retention that flows from that that I mentioned earlier.

Over the last 12 months, our use of digital sales channels reached new heights and now accounting for over a third of all sales leads coming into our U.K. business. These high levels of customer engagement in turn drive higher organic revenue growth, improved profit performance and margin, and throw off high levels of cash, which we use to reinvest back into the business, back into training, into innovation, into technology, into M&A, and indeed, to increase our dividend again in line with our dividend policy. While we continue to deliver financial results, and that's very important to us, we're also extremely focused on our wider sustainability goals. In 2021, we made further good progress with more electric vehicles, more renewable energy in our properties, more innovations, and more recycling. That progress has been recognized externally.

For example, by being one of only 700 companies globally to be included in this year's S&P Global Sustainability Yearbook. This is our RIGHT WAY plan in action, doing the right thing for colleagues who deliver a great service to customers and in turn creating value for shareholders and the wider society. It's a proven model. It's successful. It's scalable. It's a model that we continue to execute at pace. When we join forces with Terminix, it's a model that will yield even bigger benefits in the future. Now, given the very detailed capital markets day just a few months ago, I'll only cover our categories briefly today. Starting with Rentokil Pest Control, the world's greatest pest control company.

In 2021, as you can see on the slide, ongoing revenues in Pest Control grew by 18.6% ahead of the eight-year CAGR of 13.5% and exceeded GBP 2 billion for the first time with organic growth of 8.1%. Our operating profits grew by a third, reflecting strong performances as our countries moved out of lockdown. Now, one of the key drivers of organic growth is innovation, and in particular, innovation that reduces the carbon footprint of our customers. At the CMD, we set an ambitious goal to reach 25% of commercial customers with connected services by 2026. Despite a global shortage of PCBs, we had another very good year in 2021, with a further 87,000 units installed, and with our networks now carrying around 15 million messages a day.

Importantly, we've now also achieved ISO 27001 for information security across our range of connected products. Lumnia, that's our range of LED insect light traps that reduce carbon emissions by 62%, also continued to perform very strongly. Since launching our first unit in 2017, we've demonstrated the value here of continuous product development, with 4 additional products launched in the range, including a slim product for reception areas and a top-of-the-range unit that we can suspend from a warehouse ceiling. We've now sold over a of a million Lumnia units, and we increased sales last year by 65%. Technology is, of course, central to our roadmap, and we already work with the likes of Google, PA, and Cognizant to set new standards across our industry. We've recently begun a new technology partnership with Vodafone, bringing their AI capabilities to pest control.

We've begun trials which use miniature cameras to capture video and still images from around our connected devices within customer premises. That's then analyzed on Vodafone's AI platform and reported back through our apps and portals. For instance, in the future, the use of these high-definition mini cameras will enable technicians to pinpoint the precise source of a pest issue and to share those results in real time with our customers. Now, clearly, this is early development work, but we can really see the potential of AI to enhance the quality of our pest business. We've got the partner in place, the first projects are underway. Once again, Rentokil is leading in technology and pest. Finally, in pest control, as I mentioned earlier, 2021 was a very strong year for M&A, with 48 acquisitions. We had acquired annualized revenues of GBP 142 million.

Since 2016, we've acquired around 200 companies with annualized revenues of around GBP 800 million. Acquisitions absolutely remain a core part of our growth strategy. We have the M&A network, the know-how, we've got a proven acquisition model, and a deep understanding of density. The pipeline remains strong both in North America and globally, but particularly so for our targeted cities of the future. Pest has had an exceptional year. We turn now to Hygiene. At the half year, we talked about the return of our core Hygiene services. As you can see, the business delivered total ongoing revenue growth of 8.2%, of which organic revenue growth was 7.4%.

While profits in the overall category reduced by 18.3%, reflecting that expected reduction in disinfection services from its peak in 2020, profits in our core Hygiene & Wellbeing business have rebounded very strongly year-on-year, reflecting that return of the core Hygiene & Wellbeing business. Last year, we also set a new organic growth target for Hygiene & Wellbeing of between 4% and 6% over the medium term from 2022, and that this would be delivered both inside the washroom as customers demand increasing standards of hygiene, but also outside the washroom, with demand for a broader range of enhanced services across their premises. Now inside the washroom, we highlighted the opportunity to sell more services to our existing customers, including high-performance air care solutions, products with more sustainable benefits, smart digital washroom services, and in particular, no-touch services, which performed very strongly last year.

As you can see there on the slide with double-digit growth in unit sales across feminine hygiene, hand towels, soaps, and sanitizers. Turning now to hygiene outside of the washroom. Throughout the last 12 months, we've highlighted the importance of air care and air purification. We offer two ranges of air purifiers, VIRUSKILLER and InspireAir. Both of the units use hospital-grade HEPA filters, while the VIRUSKILLER unit also has an internal chamber where the air passes through UV light to disinfect the air before it's released back into the environment. Last year, we installed over 11,000 air purification units and generated annual revenues of around GBP 9 million. It's not just offices and hotels that are looking for clean air solutions.

For the second year now, we've worked alongside Tennis Australia to provide protection from airborne viruses to bacteria, to the players, to the staff, to the spectators at the Australian Open, and as the official hygiene partner, where we installed 70 VIRUSKILLER units and 800 hand sanitizer stations. Equally, if you visit the O2 here in London, you'll see that we are the official specialist hygiene services partner, providing a range of hygiene products and services, including VIRUSKILLER units, both inside and outside of their washrooms, to help ensure hygiene best practice is followed at this world-famous venue. Overall, a very successful year in both Pest Control and in Hygiene, and we expect to make further good progress in 2022.

Turning now to Protect & Enhance, as you can see on the right of the chart there, ongoing revenues increased by 5.6% in 2021, with 4.9% organic growth. Profits increased by 36.8%, reflecting the year-on-year progress on lockdowns. Our French workwear business grew revenues by 1.9%, and we saw much improved trends in customer premises lockdowns as the year progressed, ending the year close to zero. Operationally, the business continued to make good progress, with new business sales for garment rentals now being back above 2019 levels. Now turning to acquisitions, which are of course a core part of our Pest Control strategy and our Hygiene & Wellbeing strategy, enabling us to both grow our revenues and through enriching the density of our city-based operations and net operating margins.

In 2021, we delivered 52 deals, demonstrating the strength of the pipeline and our ability to create value from M&A, including, as you can see there on the map, 17 deals in North America, 9 in each of the Pacific and the U.K. ROW regions, 7 across Europe, and 5 acquisitions in each of Asia and Latin America. Including the EPS deal that we completed at the end of December 2020, but paid for in January 2021, we acquired total annualized revenues of GBP 209 million with a cash spend in the year of GBP 463 million, in line with our GBP 450 million-GBP 500 million guidance that we gave for the second half of the year. Given our strong pipeline, our target spend for M&A bolt-ons this year is around GBP 250 million.

Turning now to Terminix. Of course, we were delighted to announce our incredibly exciting acquisition of Terminix at the end of the year. On the slide here, we've concentrated this important opportunity into three key areas. Firstly, the deal delivers a step change in local density in North America, which is the world's largest pest control market. Terminix adds around 375 local locations and around 50,000 customer visits each day. This is a major opportunity to bring together our routes and our properties and to make the combined business more efficient, more effective, and more profitable. It's also a great fit, of course, with Rentokil's expertise in commercial pest control, combining with Terminix's strength in residential and termite.

As you've already heard today, pest control is an exceptional industry, and this deal increases our overall exposure to this high-quality market from around 62% of group ongoing revenues to around 75%. Of course, it opens up an enlarged customer base in North America, where we'll also be acquiring 2.9 million new customers, giving us a big platform for our innovations and our technologies. Secondly, the deal will deliver significant synergies. These are two highly complementary businesses, but with a strong operational and cultural fit, and where we're determined with Terminix to create further differentiation in the market through that continuing focus on people, on customers, on innovation, on digital, and on sustainability.

Now to be very clear, at this stage, we've not included any revenue synergies, whether from improving colleague retention, customer retention, improved sales force density from upsell, from cross-sell, from new innovations or new digital services. We expect to deliver at least $150 million of net cost synergies by the third full year post completion, with around 30% of these run rate synergies in the first year after completion. Thirdly, there, the deal delivers highly attractive financials. This is a great opportunity to increase our group net operating margins through cost reductions and operational efficiencies by around 100 basis points in each of the 3 calendar years after completion. Our net debt to EBITDA medium-term target will be of between 2-2.5 times, and so maintaining our BBB target investment grade rating.

The deal is expected to be mid-teens% accretive to our EPS in the first full year post-completion, and for returns to exceed our cost of capital by the third full year following completion. Now, given Terminix's financial results this week, we can show you this here at the bottom. More detail is in the appendix. This combines each company's financials for the full year 2021. Revenue would have amounted to $6 billion with adjusted EBITDA of $1.3 billion and free cash flow of around $700 million. So where are we at, and what do the next few months look like? Well, I'm delighted to say that we have made a great start. What has stood out at every meeting of our teams is what a strong, shared culture we have between the two businesses.

Stuart and I visited Memphis in January, and a number of joint meetings have already taken place to develop the planning of our integration program. Everyone has come back from those meetings talking about what a great fit we have with their people. When it comes to successful M&A, particularly large M&A, culture is absolutely the key, strong collaboration and a really positive and encouraging attitude from both sides. The regulatory process is fully underway, with the FTC's initial review period running until later this month. Obviously, as the process is ongoing, I'm not in a position to say anything on this today. Other than we view the market as highly fragmented and competitive, the deal is good news for colleagues and for customers, and I remain confident the transaction will be approved.

You can also see on the slide that planning for the various work streams is well underway, and in particular, we've got a major piece of work ongoing to complete the re-audit of our historical IFRS audited financials to be PCAOB or U.S. GAAP compliant. We're also putting in place the plans to meet the various listing requirements, including for the new ADSs on the New York Stock Exchange. Once that is all complete, we will then seek support of shareholders of both companies. Now as we're getting closer to closing, we're now spending an increasing amount of time on preparing for day one and integration planning.

A governance structure is in place for that integration planning with the Global Steering Committee and North American Integration Steering Committee, Integration Management Office, and Integration Investment Committee all now in place with daily and weekly meetings going on to ensure seamless delivery of our plans. We've also appointed a number of specialist third-party consultants to support the in-house experts at both Rentokil and Terminix. As you can see, we're tracking the progress of each of the 15 work streams, which include our main functions of ops, sales and marketing, IT, HR, finance, as they move through the pre-work and into the planning phase. Clearly, significant focus on synergy planning and tracking with detailed plans in development, along with very clear timelines for delivery.

We continue to expect around 50% of synergies to come from back-office and overhead savings, including procurement, and the other 50% from combining and densifying the networks. As I mentioned a moment ago, revenue synergy opportunities have not been included at this stage. Really encouraging progress on the integration planning. Lots of very positive interactions with Terminix. There have been no negative surprises to date, and we remain fully on track to close the deal in the second half of the year. In summary, in 2021, we delivered a strong financial performance with excellent M&A. We delivered total ongoing revenue growth of 9.8%, with Pest Control growing by 18.6% and Core Hygiene delivering growth of 8.2%. We continued to create a higher quality business through our innovations and our digital expertise and our focus on people.

We maintained our disciplined approach to M&A with 52 deals and profits increased by 19.5%, and our free cash flow of GBP 326.5 million, delivering a cash conversion rate of 107.3%. Encouraged by the company's performance last year and the outlook for the year ahead, the board is recommending a final dividend of 4.30 pence per share, equating to a full year dividend of 6.39 pence per share, which represents an increase of 18.1% year-on-year. Now while there's obviously a lot of work to be done on our exciting Terminix project, we will absolutely maintain our laser-like focus on executing our business as usual plans, and we're confident of delivering further operational and financial progress in the coming year.

Now with that, Stuart and I will now be very happy to take questions. I'd like to split this if I can. Here we go. I'll try into two parts. First, any questions on business performance?

Ongoing trading, business as usual. Secondly, after we've closed on that, we'll move to any questions on the Terminix transaction. If we can keep that discipline, I think it will make the flow of the Q&A a little bit more straightforward. With that, we will move to questions, please.

Simona Sarli (Equity Research Analyst)

Good morning. This is Sylvia Sarli from Bank of America. One question on your margins in 2021. You had margins improving by 130 basis points year-over-year. Adjusted for the provision release would have been just a 30-basis points improvement. If you can provide a little bit more color on the building blocks contributing to this margin progression, and specifically if you could try to quantify the headwinds that you had from wage inflation and fuel increases. Thank you.

Stuart Ingall-Tombs (CFO)

Okay. I'll do my best to unpack that question. In terms of the margin, we've had a few questions around provision releases today. I think in terms of provision releases, we've disclosed that number. It's a significant number, but it's very much sort of one side of the equation. If you look at the quality of earnings and 107% free cash flow generation, you can see that actually the quality of our own earnings net is very, very strong. If you look at, I think it's slide 17 for our cash flow, we've actually had I think a GBP 20 million inflow on working capital. Although there is an element of provision release in that margin progression, equally within 2021, we've got provision creation as well.

That provision release that we talked to was 100% created in 2020 in the initial phase of the pandemic. That release hasn't just happened. It's been the result of operational recovery of service. It's offset some service costs that we're taking that's part of that equation, and it's a result of very successful cash collection that you've seen in a number of regions where I've spoken about a lack of spike in insolvencies, very strong cash performance. I'm not gonna break down that 130, because I don't think I can do that because there's so many moving parts in there. We're very confident about the overall margin of the business and its sustainability in 2021 and 2022. I think you mentioned disinfection.

Simona Sarli (Equity Research Analyst)

No, it was wage inflation.

Stuart Ingall-Tombs (CFO)

Oh, wage inflation. Apologies. Wage inflation.

Simona Sarli (Equity Research Analyst)

Fuel. Yeah-

Stuart Ingall-Tombs (CFO)

Yeah

Simona Sarli (Equity Research Analyst)

Fuel costs. How much was the headwind to this underlying improvement of 30 basis points?

Stuart Ingall-Tombs (CFO)

Yeah. We were at about $3 a gallon, I think, in Q3. I mean, one of the comments we have seen has been Terminix talking about a $10 million headwind in 2022 as a consequence of fuel price inflation. That, as I understand, is largely the unwind of their hedging from $2 to $3. We were at $3 in Q3 in 2021. We view, again, our margins for a big chunk of the year already recovering that fuel price inflation. Expect through our pricing processes to continue to recover that in 2022. We're very confident in our processes we've put in place, and you've seen the chart that I've put up there around our processes. I think, you know, we shouldn't be overly concerned.

We're keeping a weather eye on it, but we shouldn't be overly concerned about inflationary increases, either fuel or in colleague costs and in staff costs. Staff cost inflation is very patchy, so we're seeing stronger in the U.K. We're seeing stronger in parts of the U.S. In other markets, where really there's still ongoing impacts from the pandemic, that's not really flowing through yet. In Europe, for instance, it's more around products and fuel at this point rather than in that full range of labor. Similarly in Asia, and we've got very strong retention numbers in Europe and Asia as well. It's quite localized, honestly. I think on balance, that improvement in margin is sustainable for 2022.

Clearly, we've got some, rocky old times from a macroeconomics perspective, and no one can quite call what's gonna happen next week, let alone three months or six months' time. We feel in good shape to manage it through 2022.

Simona Sarli (Equity Research Analyst)

Just as a follow-up. You mentioned that it's sustainable going in 2022. Does it mean that we should expect at least 30 basis points year-over-year improvement this year?

Stuart Ingall-Tombs (CFO)

Well, I’m not gonna give a forecast for 2022. I think that’s my answer to that. We're in the middle of a transaction and that would sound a little bit too much like a profit forecast to me. I'm gonna resist that. I would just draw your eye to our medium-term targets of 6%-9% revenue growth and 10%+ profit growth. That remains our medium-term target. The margin increment's implicit within that statement.

Simona Sarli (Equity Research Analyst)

Thank you.

Stuart Ingall-Tombs (CFO)

Mm-hmm.

Jane L. Sparrow (Equity Research Analyst)

Thank you. Hi, good morning. Jane L. Sparrow from J.P. Morgan.

Stuart Ingall-Tombs (CFO)

Hi, Jane L. Sparrow.

Jane L. Sparrow (Equity Research Analyst)

A couple from me as well, please. Firstly, on central costs. Those came in, I guess GBP 10 million-GBP 15 million higher. Can you maybe just unpick what was kind of the reason for that? And then you're guiding to that again being higher year-on-year in 2022. And it seems like a lot of the inflationary impacts flow through central costs. Can you maybe just comment on what exactly is included there and fuel, et cetera? Something that, some of the categories we might have thought were in the divisions might be in central costs. And then just a second quick one on the North American revenue recognition change, that 20 basis points. Does that have a. You've kept the 18% margin target for the end of 2022.

Is that basically a 17.8% margin target now? You know, what's the impact in 2022 as well? Thank you.

Stuart Ingall-Tombs (CFO)

Central costs, the biggest move in 2021, if you recall, we suspended executive bonuses and took executive pay holidays in 2020. That's the single largest bridge from 2020 to 2021. 2021 to 2022 then is, as I think we say in the statement, more about the reallocation of existing costs. Our central supply chain costs, which historically have been managed out of our European division. If you recall, we had a big Workwear business in Europe that's now just in France. It was the right time to reorganize that and take that out and put it in central costs. That's a net zero for the organization. It doesn't have an impact. But because of the nature of that explanation means it's really nothing to do with fuel pricing. That's not significant.

This is the infrastructure and resource around managing our global supply chain rather than the costs of the products and the fuel themselves. That all flows through into our markets and they're fully costed full margins. The 20 basis point adjustment, I kinda stress that had no impact on earnings. It was some revenue, about $38 million, I think, of revenue that we recognized as principal and therefore recognized the whole $38 million and the net profit, net of cost of sales. We agreed with our new auditors that actually that was probably not the right treatment, and we should be, because of the risks and rewards transfer of stock wasn't sufficient to justify that. Therefore, we just removed the revenue and the earnings doesn't change.

In this case, revenue equals profit because it's effectively an agency fee, if you like. That's the change. Without that, we'd have still been within our 16.5%-17% guidance for 2021. You know, we still would have been absolutely fine with that. Therefore, I don't think it makes any change to our 18% targets for 2022. It's within that range that we expected, and therefore I wouldn't read across either +0.2% or -0.2%. It's the way we see it today. It's consistent.

Jane L. Sparrow (Equity Research Analyst)

Okay. I guess the difference, so 16.5%-17%, you've come in in the middle with the 20 basis points. It was labor fuel that, 'cause presumably you would have thought you'll be in the middle.

Stuart Ingall-Tombs (CFO)

Yeah, I mean, I think.

Jane L. Sparrow (Equity Research Analyst)

It was slightly weaker because of some of the costs.

Stuart Ingall-Tombs (CFO)

It was at the lower end for sure. I mean, I think if you saw that, disinfection was $2.7 million in H2 compared to, I can't remember what it was, but over $100 million, $64 million dollars was-

Andrew Grobler (Analyst)

Pounds.

Stuart Ingall-Tombs (CFO)

GBP 60 million. That's right. In H2 2020, that's what was causing that difference really was in that range of, well, we think it's gonna be 16.5%-17%. It was the lower end 'cause we really got virtually no disinfection. That's really the answer.

Jane L. Sparrow (Equity Research Analyst)

Thank you very much.

Stuart Ingall-Tombs (CFO)

Yeah.

Andrew Grobler (Analyst)

Hi, it's Andrew Grobler from Credit Suisse.

Stuart Ingall-Tombs (CFO)

Andy.

Andrew Grobler (Analyst)

Three, if I may. Just firstly, going back to provisions, because I think it's caused a bit of confusion that you've got the 14.9% margin for the year, and then you talked about this 100 basis points of provision release. Just to be clear, is that 14.9, is that the right starting point to think about whatever margins are going to be in 2022 and not 13.9 as a start? Just to clarify and why that's the case. Secondly, on inflation, sorry, another topic to go back to. You talked about the U.S., that you substantially recovered the inflation. Can you explain what substantially means in that context? Thirdly, a slightly broader one.

You talked a little about digital AI and your relationship with Vodafone. Do you see that as a margin opportunity going forward, i.e., that you can centralize some of your technicians and send people out with phones to do some of those site inspections, i.e., send out lower cost people to do those inspections? Thank you.

Stuart Ingall-Tombs (CFO)

I'll take the first two. Yes, you should consider 14.9% as the starting point for margins for 2022. Inflation substantially recovered. I think it was a couple of basis points short, if I'm honest, so I couldn't quite say that it was 100%, but it was materially recovered, and we expect to materially recover inflation through our price increases in 2022 as well. It's not a significant difference, Andy, is the answer, but I couldn't quite say 100% is the, in truth.

Andrew Grobler (Analyst)

Okay.

Andy Ransom (CEO)

Thanks for giving me a go today, Andy. I thought it was gonna be the Stuart Show, so I was just relaxing. Thanks for the question. Obviously at the Capital Markets Day, we did a bit of a show and tell on connected technology, which is

If you like the burglar alarm for pests, and that's what we're already using, that's what you heard me talk about Connect, and that's where we've got the target of 25%, etc. That we explained at the CMD that that is both a growth play, we expect to grow the business off the back of that, but also in time, a margin play. It's broadly margin neutral at the beginning, but we see margins increasing over time. On the AI and the camera, it is probably too early to say. I mean, this is genuine groundbreaking technology. The first thing we've got to do is get technology that works. Well, we've done that. We've achieved that, and with Vodafone, we've achieved it.

Next thing is we've got to get that to a scalability that makes sense for customers. You got to put cameras they come at a cost. It's really early days, but think about it in the same way, effectively, as Connect. Exactly the same. We would see this as an opportunity to grow revenues because we've got a technology that others don't, that's groundbreaking, that gives real genuine insight, and that's the difference here between, somebody spotting a mouse running around a warehouse to the technology seeing it. This is. Des and me might not talk all day, and this is really cool stuff. This isn't just telling you you've got a mouse running around. It's telling you which mouse you've got running around.

You've got mouse 47, facial recognition technology spotting, and it's saying, this mouse has come back to this part of the warehouse 17 times in the last 24 hours. You can actually pinpoint the exact issue that a customer's got. If you can get to a pest problem like that before it becomes an infestation, your customers love you. What you don't wanna be doing is trying to solve a problem after it's got out of control. We think it gives us the revenue opportunity in time, this is very early, but it will also give us that margin opportunity again, which comes from, well, we're not gonna have to go out to visit the customer as much because the cameras, which will be live, will be able to tell us, well, mouse 47's been back again this morning.

You know, the solution's not working, so we need to send someone down. Or actually, mouse 47 is no longer with us. You know, that's how it will work. It will be revenue, but it will be margin, but we're a few years off commercializing this. This is just, it's too exciting not to talk about it, but you can't put it in your model at this stage. Revenue and margin in the fullness of time.

Andrew Grobler (Analyst)

Thank you.

Cheers.

Dominic Etheridge (Equity Research Analyst)

It's Dominic Etheridge from Deutsche Bank. Just three questions from myself. Firstly, more of a general one just about looking at branch margins, particularly compare them with 2019 now looking forwards. Can you just say a little bit about the dispersion and how that's looking? I mean, are you seeing an overall improvement across the whole business, or is it particularly in certain areas? What I'm sort of trying to understand is obviously done a lot of M&A, particularly in the South East. So obviously there's gonna be a lot of margin improvement over time there. But for instance, on the West Coast, where your margins have been lower and your M&A has been lower, obviously, it'd be interesting to see what organic improvements are going on there.

Secondly, just in terms of PestConnect, can you just remind us about the geographies? I know obviously the U.K. was the starting point. Can you just say a little bit about the rollout and what sort of interest you're seeing in other countries as well? The last one, which is a very specific question, I'm just wondering, in terms of U.S. labor, could you give us an idea of what the open number of technicians you have per branch in terms of vacancies at the moment? Thanks so much.

Andy Ransom (CEO)

Oh, yeah. Things lead. This is work.

Dominic Etheridge (Equity Research Analyst)

You might know why I'm asking that specific question.

Andy Ransom (CEO)

This will work out. Well, I'm gonna attempt in reverse order. I'm gonna attempt the third one and the second one, and Stu, you can talk about local margins. On the third one, I'm trying to do this from memory. It's a timed question. We have got 275 branch locations in the United States, and I think we have got 15 of them where colleague retention is below, I wanna say 85%. I think we've got about 15 out of 275 where the retention is lower than the average across the business. In those 15, 13 of them have only got, I think it's 2 vacancies. I mean, I'm giving you data. I could do it another way.

Very few of our branches across the United States have material gaps. Maybe there's half a dozen with a few. It's also the beginning of the year. It's something you have to watch carefully. This is the beginning of the season. Colleague retention is typically better in the Q1 and then we need more people as we hit the season. Can't guarantee it will remain as good as it is for the whole season because it'll get busy. Right now, we're down to a handful of branches that don't have, the required level of people. Where we are missing people, it's ones and twos. It's not fives and tens. You know, if you've got one or two people missing from a branch, you can cover it.

We're not seeing that as an issue right now. PestConnect geographies, you're right, and U.K. is still our biggest market. I think Holland is our second biggest market. France is our third. Australia is our fourth. Malaysia is our fifth. As I said briefly in the comments, we would have done even better than we did, and it's pretty good, but for the global shortage of PCBs. We didn't have enough units. I throttled back in America, and I said, "Let's not launch in America. We've got too much going on with the IT replatform. Now we've got the Terminix, and we haven't got enough units. So what's the point of scaling everyone back?" We manifestly have not gone into the States other than in small pilots, but the interest is great.

As I say, I don't know, I'm you know, showboating now. I reckon we could have sold twice what we did if we'd had the units, if we'd had the PCBs. Supply chain is gonna be challenged for this year. It gets better in the second half of 2022. And then 2023, it looks absolutely fine. You should expect us to build in H2 and have an excellent performance in 2023. The customer response is fantastic. I've said before, once you've had this, once you've got this technology, I don't see you taking it out if you're a customer.

Why would it's like giving you a piece of IT kit and then say, "Well, I wanna take that back and give you paper records instead." Customer response has been fabulous. If anything, can we have more? We've got some big customers who want to put their entire estates on it, and we don't have enough PCBs. That's, you know, a high-class problem. I'd rather it be that way around. It's mainly Western Europe, Australia, and two or three markets in Asia where we've gone to. U.S. is the big one to come, but that will have to wait until we get enough PCB units. Branch-based profitability margins, Jim.

Stuart Ingall-Tombs (CFO)

Yeah. I've got another question from online that I'll answer at the same time, which is I'll read it out. Can you talk around the margin dynamics in North America given ex-revenue recognition change? These were only at 16.5% at the bottom of the 16.5%-17% range. What was exit rate margin for the year, and what are the key building blocks to 18% target exiting 2022? To answer specifically, I'm—I think you sort of answered your own question. You're absolutely right. If you look at the Southeast, where we've got a significant amount of acquisitions, we've got EPS, we've got Florida Pest Control, we've got Active in Atlanta.

There's a big chunk of acquisitions there and so there's overlay on overlay together with the replatforming. You'll have seen the replatforming of EPS and Florida Pest Control, I think, in April and May. That's a big step change for us in terms of the acquisition-driven margin accretion, and I'm sort of answering Allen's question here at the same time. That's a big element for us in the Southeast. In the West, it's not just the acquisition-driven density play. We're gonna get significant benefit across sales productivity, service productivity from the replatforming, meaning we're all on one routing system, consolidated administration, centralized administration using a single process that enables us to streamline. As I said before, it's critical to deliver a better customer service.

Some of our customer service where we're having handoffs between central and local and technician can be not ideal, let's say. We're gonna get those benefits in the West in any case. Fewer in the Northeast, where our margins are relatively strong, we've got good density, and we've done fewer acquisitions. They're on the legacy platform anyway, so there's less benefit from consolidation. I'm not gonna break out the sort of the building blocks, as Alan requested, around how we see those different elements because they're a bit of a blend. In the Southeast in particular, I can't say, "Well, this much comes from replatforming, and this much comes from acquisitions." Life's not like that.

I think all those things coming together very effectively in 2022 mean we've got a very high level of confidence. You're right in your analysis. We'll get more progress in the Southeast than the West than the Northeast, and that's how we expect it to play out. I do have some other online questions if there's no more in the room. There's a question from John Thurston. Do the turnover and profit figure increases for ongoing businesses include the increases from M&A activities? Answer is yes, they very definitely do. That's a key part of our model, and it's one of our key drivers of our 6%-9% committed revenue growth. There's a couple on Terminix, so I will leave those for now.

There's a question from Jane Sparrow of Barclays. 2022, we'll see a further unwind of disinfection revenues, and the 2021 provisions release won't repeat. The regional impact of these factors varies quite a lot. You've said you're on track to achieve 18% North American target by the end of the year. Can you provide a bit more color on how you're thinking about the margin outlook for the other regions in 2022? Also, please, can you comment on the H1 outlook for group margin, given that it is where the biggest impact of disinfection unwind will be felt? Again, a few things to unpack there. You know, clearly North America is where we've got the biggest disinfection unwind. It's pretty much gone by the middle of May, I think it is.

Yeah, we're gonna have a little bit of a headwind in the first half in North America in particular, but our commitment to 18% is irrespective of that because part of the 18% is the recovery of the core, and we believe that the core is substantially recovered, and that's why we're still very confident delivering 18% over the year. Other parts of the group, again, I wanna steer clear of profit forecasts. It depends a little bit, I think. Asia is still a little bit under the weather. Omicron has hit Asia late. As we've said, government support has largely dropped away, and they're getting more insolvencies.

I think Asia will be interesting to see how that plays out, but I don't have a crystal ball on that. I think they're probably lagging recovery. Europe, obviously we have some challenges around the situation in Ukraine. We expect a reasonably strong recovery in Europe, notwithstanding that as Workwear and Hygiene, as people go back to the office, we expect those to bounce back, and that should support margin in Europe. Clearly, the U.K. does have the headwind of the provision releases. As we've said, that only accounts for 220 basis points of their margin improvement, and so at an underlying level, we expect good margin sustainability there. It really does depend on the rate of the macroeconomic changes we see.

We're pretty confident in aggregate about our year-end 2022 outcome, but with a little bit of a headwind in H1, as Jane rightly implies that around the unwind of disinfection.

Andy Ransom (CEO)

Just in case anyone misinterpreted your comment, we have no business in Russia. We have no business in the Ukraine. Stuart's comment was just the more macro situation and whether that has a you know-

Stuart Ingall-Tombs (CFO)

Yeah. Thanks, Andy.

Andy Ransom (CEO)

an impact beyond that. In direct impact, there is no direct impact on the business.

Stuart Ingall-Tombs (CFO)

Yeah, please.

Simona Sarli (Equity Research Analyst)

Can I just ask one follow-up on free cash flow generation?

Stuart Ingall-Tombs (CFO)

Mm-hmm.

Simona Sarli (Equity Research Analyst)

You mentioned a very strong cash conversion, and indeed you had a solid working capital inflow. Looking at your accounts, it looks more related to strong inflows from trade receivables. Are you using factoring? If so, how much is the contribution from factoring?

Stuart Ingall-Tombs (CFO)

Yeah. We do use factoring. But like-for-like is almost no movement between year ends, and it's a very small part of the ledger. It's about GBP 20 million-GBP 40 million. It's in that range. It was pretty much the same number, first of January to thirty-first of December. The impact on cash flow

Simona Sarli (Equity Research Analyst)

There is no delta that is impacting.

Stuart Ingall-Tombs (CFO)

No.

Simona Sarli (Equity Research Analyst)

Okay.

Stuart Ingall-Tombs (CFO)

No. There isn't.

Simona Sarli (Equity Research Analyst)

Thank you.

Stuart Ingall-Tombs (CFO)

No, honestly, we've had a terrific cash performance. I think, clearly there's been some support from governments injecting liquidity into economies. I think at an underlying level, our operational performance is what's delivered this very strong cash performance, and we think that's sustainable. We're still sticking to our 90% cash conversion as a medium-term target. I think if you see, we'll expect to see a little bit of a bounce back in CapEx in 2022 because that PCB issue in vehicles has constrained us a little bit in vehicle purchasing. That's an element. We expected a bounce back in 2021, but it didn't really, a little bit, but not fully. We'll see some of that in 2022. We're very happy with our underlying cash performance.

Simona Sarli (Equity Research Analyst)

What was driving the improvement in DSO? Again, we should assume like a further improvement in 2022. Is that sustainable?

Stuart Ingall-Tombs (CFO)

Yeah. I'm not sure I'd commit to a further improvement in 2022, honestly. I do think our performance is sustainable. I think over the last two years, 18 months, people in Rentokil recognized that cash meant survival. Being a very focused operational organization, we improved our underlying processes to make that level of collection activity sustainable. I don't think I'd commit to a further improvement, but I do think what we're doing today will continue on through 2022.

Simona Sarli (Equity Research Analyst)

Thank you.

Andy Ransom (CEO)

Have we got any more questions on business? 'cause I'm quite keen to get on to Terminix and then

Stuart Ingall-Tombs (CFO)

Sure. I've got a couple of Terminix questions here. Well you can read them for yourself probably, Andy. It's easier.

Andy Ransom (CEO)

Thank you very much.

Stuart Ingall-Tombs (CFO)

There's that bottom half there.

Andy Ransom (CEO)

Thank you, Stuart. Right. The first question is, can you comment on the potential timing of antitrust approval in the U.S.? Well, sort of no and yes, I suppose. I commented in the remarks. The process for those who are not familiar with the Hart-Scott-Rodino process, you make an initial filing. The FTC in this case has a period of time in which to consider it. That's typically in this market 60 days. That process is off and running. We're engaging in a very normal fashion with FTC. They're going through their processes. They're going through their analysis. They're talking to the market, talking to customers. Everything exactly as one would expect.

As I said in my remarks, later in this month, FTC comes to one of two decisions. Either FTC says nothing. In fact, they don't actually say anything. The time expires. They issue a second request, and it's as simple as that. The second request is again, if you're not familiar with it, I am. I've been through that many times. It's a very detailed set of questions and detailed follow-up questions in the market. We will either be through the process or we will be in second request. That will be later in the month of March, and that will be, entirely for the FTC to decide when they complete their inquiries.

You know, other than that, I can't comment on it. I can only, reiterate what I've said many times is I'm very confident about the transaction. It's incredibly competitive markets, incredibly fragmented market, lots of competition. I believe the deal gets approved, but we'll see what the next step is. It's either the expiration of the initial waiting period or it's a second request. The second request, that doesn't mean anything particularly other than the FTC needs more information to complete its investigation. Let us see where we get to. Next question was, following the Terminix acquisition in North America, will the new business continue trading under the original Terminix and Rentokil brands or all be converted to Rentokil or branded jointly, Rentokil and Rentokil-Terminix? Really good question.

I've stressed many times that the strength of Rentokil heritage historically for 97.5 years has been commercial. We're the kings of commercial pest control. That's what we're globally renowned for. We're big in resi and termite in the States as well. You know, if you ask most customers, who we deal with, they would say we're the best in the world in commercial. Terminix is the leading brand in residential, and it's the leading brand in termites. Directionally, we fully expect that residential and termite will be branded Terminix and commercial. Certainly, big commercial customers will all be branded Rentokil. That's the direction of travel. To get to that direction, to get to that end state, we will clearly have to have a transition period. We're working through that

I mentioned, we're using external consultants in a number of places. We're working through that, and we will come to the right transition journey. I think if you look at, in many respects, brand is actually more important to the residential customer than it is the commercial customer. We've got big power brands in West Coast, Western Exterminator, in Florida Pest Control, in the Northeast, J.C. Ehrlich. I think where we've got big, strong regional brands, we will probably co-brand. It'll be Western Terminix or Terminix Western. It'll be Florida Terminix or Terminix Florida. We're not that clever. I mean, there's not many choices, are there? Whether we will keep that forever, I think that'll be determined over the fullness of time.

I think that's the logical transition phase to get us towards the end state of Terminix for resi and for commercial, and for termite and commercial will be Rentokil. Can you provide any update regarding the sale of Terminix U.K. and Norwegian Pest Control business? Not really. Those are just for those who are not familiar, those are two relatively small assets. In the case of the U.K., we sold that business to Terminix a couple of years ago. We're not gonna be able to buy it back. Terminix has to sell it. Norway, it looks like a tight market share there. Discretion is the better part of valor on that one.

It was concluded that both of those assets would be sold pre the deal, so as not to clog up the mainmain arteries of the transaction. Those are transactions that Terminix is handling. Rentokil has no involvement in those transactions. It's not appropriate that we should. In terms of anecdotally, I'm told both processes are going well. That's as much as I can say.

Stuart Ingall-Tombs (CFO)

There's an additional question. Have you had any engagement with Terminix shareholders and any sense on their willingness to accept the offer?

Andy Ransom (CEO)

Yeah, we've had, I'd say really good engagement, and next week we'll be doing a roadshow activity here in London, or it'll be virtual, I think most of it. The following week, I'm off to New York to do joint investor relations events with Bradley Paulsen, side by side. We've done a bit of that already. We've done some investor calls, we've done some sell-side analyst calls, fireside chats as they do over there. We've done our own events where we've done direct conversations with Terminix shareholders. I have to say, with perhaps one exception, those meetings have been excellent. They've been really receptive, very open, and it's interesting. They understand Terminix very well. They know much less about Rentokil. They're American holders in the main.

Some of them are cross-holders and hold both. For the people that are new to Rentokil, they're really interested in the story. They're really interested in the machine, the model, how do you make the model work. I'd have to say it's been really positive. No, I don't think we've had any challenging conversations at all on the deal. They get the industrial logic, they get the economics, they understand the process that needs to be gone through to get to shareholder vote. No, not receiving any pushback, I say, with perhaps one exception.

Stuart Ingall-Tombs (CFO)

From Hiten, there's a question which is about HSR and FTC. I think you've covered that. There's a supplementary element to it, which is how is it progressing with other regulators, and when should we envisage the shareholder votes on the transaction? I'll take that element of it. Andy alluded to it in his presentation, that is we've got quite a heavy lift around our numbers. Forgive me, I'm gonna dive into this for a moment. Rentokil Initial produces its numbers under international auditing standards in IFRS.

For Terminix's proxy statement, where they have to produce pro forma results for the combination, we have to go back and have re-audited, not just translated to U.S. GAAP, but re-audited to PCAOB standards, which is the U.S. auditing standard for 2019, 2020 and 2021. You can imagine, auditors are pretty busy right now. As soon as the year-end process is completed, we're having two sets of auditors re-descend on us in order that we can produce those PCAOB-audited accounts. We can prepare the draft proxy statement with Terminix such that they can then submit it to the SEC for their review. That's the sort of the intricacies. It's all process. It's not, no sort of big judgments or decisions there.

That's one of the drivers for why this is gonna be an H2 transaction, not H1. It's not just about antitrust. We've got quite a heavy lift around regulatory approvals that we need to get through. It is processes. It's not judgment.

Andy Ransom (CEO)

Yeah. On the first part of the question, no, I mean, we've covered that. We've covered the FTC in the States. We've covered what is happening in the U.K. and Norway. There's no other regulatory requirements relating to the transaction, save that we will need to list the ADSs on the New York Stock Exchange, which require all of those numbers that Stuart was talking about in the appropriate filings. So we can't go to shareholders until the antitrust is resolved, until the accounts have been re-audited, and till we've done the listing, and then we can go out to shareholders. Again, that's why we've said at the beginning it's an H2 transaction. As the chart on the deck suggested, we're right on track, exactly where we expected to be at this stage.

All the way around the room.

Stuart Ingall-Tombs (CFO)

There's a question up the front here.

Simona Sarli (Equity Research Analyst)

Yes. Again, Simona from Bank of America. Follow up on antitrust for Andy. What do you think will be probably the main critical point around antitrust? Will that be more around national accounts, or is there anything else from your point of view? In terms of national accounts, if you can remind us in the U.S. yours and Terminix exposure, and if you think that there is any specific overlap in some regions. Thank you.

Andy Ransom (CEO)

Yeah. Well, you're getting into a fair bit of detail, as you usually do, Simona. I'll attempt to give an answer to that. I'm not going to give you the detailed answer. I'll repeat. You know I'm a lawyer, with apologies, but I am, and I've spent a lot of time in this space. I don't think there will be any antitrust issue, and I've said that since the beginning. Inviting me to speculate on a non-issue, I'll give it a go. If you wanna talk about national account in the United States, the first thing is a bit of a definitional issue. You know, I could ask you, what do you mean by national account?

Because actually, if we polled the room, you'd all have a different answer as to what's a national account. That's the first issue. What is a national account? Is it a big customer? Is it a customer that's got premises in 25 states across the U.S.? Is it a customer that only wants to buy on a pan-state basis? That's the first problem. What are we talking about here? If we were to define national accounts as being big customers who want to buy across, let's say, 10 states, that's a reasonable definition. Ecolab is by far and away the market leader in the U.S. Rollins are second, we come third, and Terminix is a relatively weak fourth.

Terminix has only been in national accounts for about four years when they bought a company called Copesan. Copesan had revenues about $75 million, give or take. They've largely not integrated that business. So Terminix's revenues in that space are, let's call it $80 million-$100 million. I'm not gonna give you our figure. It really does depend on how you wanna define it. I've already said we're number three in the market with a very strong number one there. There are other regional players as well, and that's one of the problems. If you look at national, a lot of the people are either big on the West or they're big in the Southeast. So are they a national player or are they just a Western regional player?

You've got all these definitional issues. The real point is, I don't think there's an issue there at all. The FTC will, complete their work, and they will come to a view, or they'll come to the view that they want more information. In terms of, regional overlaps in, more generally, there's 900 cities and towns that meet a certain definition in America, we've done huge analysis and, there's just no town or city that you can really identify where if you googled pest control near me, you wouldn't come up with 10, 15, 20, 25 players. I don't think there's any regional issue.

I don't think there's a national issue, but the national issue would be, the scale of it if you want that is, as I say, about $80 million-$100 million of Terminix's $2 billion plus comes in that sort of quasi-national space. All right. Lady there with the mic.

Nicole Manion (Director - Equity Analyst)

Hi.

Andy Ransom (CEO)

Hi.

Nicole Manion (Director - Equity Analyst)

It's Nicole Manion from UBS.

Andy Ransom (CEO)

Hi, Nicole.

Nicole Manion (Director - Equity Analyst)

Just two questions, please. The first one, I think Terminix said the other day that they were pushing on with some of their operational investments, specifically Terminix Way and also their customer experience platform. Just wanted to get your sort of take on whether you're involved in discussions around that, given that, you know, there could be some duplication of work potentially, and also that's presumably stuff that you'd have to have some agreement on. Secondly, can you talk at all around how you see ROIC, both I guess now compared to 2019, but also post-Terminix compared to now? Thanks.

Andy Ransom (CEO)

Well, I'm going nowhere near the second one, Nicole. That's for this chap. The first one I'll gladly talk to. I think couple of things that we have to be mindful of here. In the U.S., they have some pretty stringent gun jumping rules. You can't start acting between two parties that are in a merger. You can't start acting as if the merger has already been completed and taking decisions. We certainly can't call the shots, and they have to be very mindful that, regulators take a dim view if you start to coordinate activities.

We've been incredibly careful not to sort of go down that road and say, "Well, I wouldn't do that if I were you." We've been very open as well in terms of this is where we are on our IT replatform, and they've been very open with us as to where they are. What we're spending most of our time with is to try to agree with Terminix what the end state IT story needs to be. There's 23 separate work streams, and there's 1 for HR, and there's 1 for finance, and there's 6 for ops, and they go through all of these. If we could agree that over the next few weeks, and we've had a 4-day, I think, event in New York which brought the teams together.

You know, you'd imagine, oh, my God, this is gonna be a real bum fight here. No, not at all. A really good meeting between the teams as to best of breed, who's what are they like? What are they not like? What are we like? What are we less keen on? We're working with their team very closely to come up with a joint view, and I think it will be a joint view of what that end-to-end solution should be. In the meantime, I think, Brett has commented that they're continuing with their customer experience pilots that they've already got underway. They're a bit behind plan because of some, COVID-related absences, et cetera.

Look, if I was Brett, what would I do? I would be trying to make good progress in all the things that look like absolute, no-brainers, and I probably wouldn't be rushing to do some of the more, risky elements of it. That's his call. It has to be his call. Working together as a single team to come up with a new blueprint as to what the future looks like, he has to decide what he does between now and he is deciding, but he's a smart guy, so I think he'll make some good calls. ROIC?

Stuart Ingall-Tombs (CFO)

Yeah. Returns. What we've said is that we'll exceed our cost of capital by the third year post-completion. That's at that $150 million dollar level of synergies, which we've said is an at least number. Logically, if it's above that, then either we'll get to where we wanna be earlier, or we'll get beyond that point. I think that's all I can say about ROIC in context of the deal. The other thing to say is this is not replacement allocation of capital. We continue to invest in our existing bolt-on program globally, and we think about that three ways. We think about it pest control in the U.S., and because we've still got a way to go before this transaction completes, we're carrying on with that bolt-on program in the U.S.

Pest Control globally, and you can see that we've had a really good year in 2021 Pest Control globally, and we're continuing to do that. All of our calculations around capital allocation in the context of the deal give us the headroom to carry on with our bolt-on program as it exists. It doesn't constrain that. Then thirdly, of course, the Hygiene opportunity, and you see we've started that. The pipelines are building, and we expect to be able to continue to invest there. Those are our existing IRR requirements. We're not diluting that. So whatever happens within the new combined organization, very clearly we'll continue to get the levels of returns that we're expecting and asking for from the constituent parts.

James Beard (Equity Research Analyst)

Hi. Thanks. James Beard from Numis. Couple of questions. Just following up on that returns question.

What is your WACC? What do you see as your WACC? Secondly, just on CapEx, what are your sort of expectations post-deal completion for the sort of level of CapEx required for this business? Do you see there sort of being opportunities to enact efficiencies, or are you gonna have to invest relatively more heavily in the Terminix side of the business?

Andy Ransom (CEO)

I'll do CapEx if you like.

Stuart Ingall-Tombs (CFO)

Yeah, go ahead.

Andy Ransom (CEO)

Yeah. Well, on the CapEx one, first off, Terminix is heavily skewed to residential and termite, which is relatively at the light end of the CapEx investment. You know, pest control is a bit heavier on commercial. You've got the ongoing capital needs of that business. Depending on, which accounting treatment you're looking at, we'll either buy vehicles or we'll rent them. Well, part of this consolidation is when we consolidate routes over the next, year to three years, we'll need less vehicles because we'll have tighter routes. You know, the joint organization will spend less on the big area that we spend capital, which is on vehicles. Talked to Nicole's question about IT.

Terminix has spent a lot of cash capital on IT. We think actually bringing the IT platform together across the single organization will lower the cash capital requirements of the combined business. We think that's an opportunity, not a drain. If I stick to sort of cash as opposed to capital, I know that wasn't quite your question. One of the things that we're at pains to point out, and one of the reasons I bore for Britain on the machine and the importance of people, is we've taken some views that to bring these businesses together and to harmonize them, we will have to improve some employee benefits and harmonize them. There will be some cash that needs to go into investing in the business.

That's,that again, that's a high-cost problem because we'll get that back through improved colleague retention, customer retention and ultimately organic revenue growth. Net, I don't think there's a big investment needed here, on the CapEx side. We'll need fewer buildings, so we won't need to invest. We'll need fewer vehicles; we won't need to invest. We'll end up with a lower cost IT platform, so that won't be an issue. We've got more, sort of technology in the field when we come to connect and back to Andy's there, but that it's relatively small and it's relatively, early in the piece. I don't think you're gonna see a big, certainly not a negative, cash CapEx impact of the combination. There'll be some savings.

Stuart Ingall-Tombs (CFO)

Yeah. On WACC, I mean, we don't disclose it. If I went around this room, every single one of you would have a different number for our WACC. We'd either be high or low, but it's a prudent WACC. It's sensible. It's based on up-to-date data around our cost of debt and cost of equity, and that's why we feel, like, very confident to make the statement we made around the ROIC exceeding it after year three.

Andrew Grobler (Analyst)

Hi, it's Andy from Credit Suisse again. Just to, if I may, you mentioned that there was no revenue synergies in your expectations.

Andy Ransom (CEO)

Yeah.

Andrew Grobler (Analyst)

Could you talk about some of your other, just to give us a sense, some of your other bigger deals, so EPS or Florida Pest or Western, what kind of revenue synergies you have been able to generate? Secondly, when you talk about the synergy number, you clearly split that out between-

Andy Ransom (CEO)

Yeah

Andrew Grobler (Analyst)

Network benefits and back office benefits.

Andy Ransom (CEO)

Yeah.

Andrew Grobler (Analyst)

You've just gone through a process where your North American margins through replatforming have gone up by about 300 basis points and have got more to go. Terminix has had a troubled couple of years. Aren't there incremental benefits that are just gonna come from making that a better business on top of those synergy benefits, or is that getting overly optimistic?

Andy Ransom (CEO)

Well, you know, it wouldn't be for me to stop you getting overly optimistic, Andy. Perish the thought. I'll take that one first. What we've said, I mean, yes, is the directional answer to the second question. I'll come back to the first one. Yes, the directional answer there. What I've sort of said in response to that is, look, this is a large network combination, and we've got fantastic experience of bringing branches together, and we've done, hundreds and hundreds of these. Of course, we have to do 300-odd not on the same day, but over the same period of time. That's why we've given ourselves this two-three-year period to do that.

The sort of benefits that I think you're looking for, I think would be reasonable and respectable to ask us about for the period that comes once we've got the branches harmonized. I've sort of said a few times, look, I get the point. I do get the point, but you're in danger of bringing in future margin opportunities and bringing it into the first three years where we're gonna be incredibly busy bringing these networks together. You might be right. We might get some of those benefits earlier. Back to the fact we are a conservative outfit. We are prudent. We don't calculate ourselves rich. We'd always rather, guide and beat. That's always been, historically our view.

I think, give us the time to close the deal, give us the time to start that consolidation of the network, and ask us that question again. And probably ask it, well, if we're not seeing additional benefits from that network, why not? Because I think you're right directionally, but what we've not done is say, "Oh, well, we'll have a bit of that. We'll have a bit of that. We'll call the number, X." We don't do that. Every number in the December release has to be verified by accountants, bankers, lawyers. It's really thorough process. You can't just throw a number out like you used to in the good old days. It's,

I think the direction of your question is not wrong, but I think you may be pulling forward some additional benefits. On revenue synergies, I'm not gonna answer, we haven't given you a revenue synergy number, so give us one for, other deals. It was a good try. What we see in the first few months of a transaction is if there's going to be any attrition on a deal, it happens in the first few months. If there's gonna be any customer fallout, that happens in the first few months. We will be laser-like focused with Terminix to make sure that doesn't happen.

The prime driver for loss of customers in this sort of situation is disruption amongst the technician. This is why I keep banging on about the importance of colleague retention and the importance of culture, the importance of training, the importance of pay and benefits that is done so well. Terminix agrees. If we get that right, then, we will have secured the first objective, which is customers are not only gonna not see a drop in service, they're gonna see an improvement in service. Once we get to that point, we can start thinking. It's back to why this wheel is so important and it, because it's so true. If you're giving customers really good service, they're happy. They will take a price increase.

If you're giving customers poor service, they don't wanna talk about price increase, they wanna talk about why you didn't turn up last Thursday. That's why this whole flywheel is so important. Honestly, I think, you shouldn't expect a lot of revenue synergies in the first year because that will be the transition as we're putting it together. Once we get the flywheel going, happy, engaged colleagues deliver great customer service. The customers are happier, they buy more, they stay longer, they take price increases, they pay their bills on time. Then that's the fun bit, we've got some additional, innovations, some additional service lines to bring.

Also the fun bit, on the Terminix side is their model before we turned up, was very much once they get their IT replatform done, now the joint replatform, they see some very material opportunities in cross-selling, additional service lines between, termite to resi customers, mosquito to resi customers and so on. That for me is the real upside. You know, stabilize the business, improve customer retention, that's fantastic. Then you've got the opportunity to sell more services into a happy customer base. It will come in sort of waves, is the way to think about it. You know, I think when we do acquisitions, this is not special about Terminix, we never, ever put revenue synergies into the model. We never calculate ourselves rich.

We do it all on hard cost savings, and then we go after the revenue. Again, that one, come back to us a few months after we close the deal, and I'll tell you exactly what it's looking like, and then we can talk about what that opportunity looks like. 'Cause I think there is an opportunity, but it's too early to call it.

Stuart Ingall-Tombs (CFO)

Just a follow-up on that, Andy, from George Gregory. To what degree, if any, are the synergies affected by the inflationary environment? You've got a view on that.

Andy Ransom (CEO)

Wow. That's a tricky one. I mean, I suppose I'll answer it this way: When we put the synergy target together, it's driven off of cold, hard cost-based synergies. We didn't factor an inflation factor into calculating those. Full stop. If we think about the business generally, we've already said, as inflation comes into our business, we turn around and pass it on to customers. We see that. We're not trying to gain an advantage. We're not trying to jack our prices up. We're not trying to drive margins through price. We're simply trying to recover input cost inflation, through pass it on to the customers.

I don't think that will change, and I think that will be the model that we will adopt and, directionally it's the model that Terminix adopts as well. I don't think it drives the synergy number per se. If there's, a higher cost in the business, I suppose I could calculate that the synergy might go up a little bit. But equally, if there's a non-recoverable cost coming into the network, we would get that back on price.

Stuart Ingall-Tombs (CFO)

Yeah. That's right.

Andy Ransom (CEO)

I think it's broadly a neutral.

Stuart Ingall-Tombs (CFO)

A couple of questions from Allen Wells at Jefferies around colleague retention. A lot has been made on issues with staff retention at Terminix. What, in your view, has gone wrong here, and how is Rentokil different here? What do you focus on to improve? Can you comment on any differences in incentivization in technician branch managers at Terminix versus Rentokil?

Andy Ransom (CEO)

Look, I mean, I could do a day on this subject and still not answer the question adequately, I'm sure. Broadly speaking, you've heard me talk many times about the importance of colleagues, and it is the fundamental reason why Rentokil has been successful the last eight years because we focus always on the employer of choice agenda. The very first item on every single meeting in the group is safety. The second item is always people. We focus on it, and we focus on culture, and we focus on behaviors, we focus on engagement, and we also focus on pay and rations. If you talk to Brett and ask him about his journey in Terminix since the 18 months he's been there, he will tell you he's doing exactly the same.

For me, that's one of the great things is that the agenda that we have is so similar. They are a lot further behind Rentokil. They have lost some years in this. It's not really for me to say how did they get there, but in shorthand, I think it's a decade of focusing in a different place. They've had different strategies, they've had different management teams, they have different focus areas, but I don't think they've ever really focused, inverted the triangle, if you like. I don't think they've ever really focused on the front line. The front line are the most important people in our business. In a quick way, that I think is the answer. I think Brett would completely agree with me.

I know he would because we've talked about it. In terms of, different pay and rations at branch manager level, that's getting into a little bit of detail. I do think as a general rule, what we've seen is there are some variations at the front line on fixed and variable, where it's probably more fixed in Rentokil and a bit more variable. I think that's something we'll look at, how easy it is to get through the induction period, something that Brett is looking at. I think there are some real hard-edged areas that we can look at. In terms of the comp for the branch managers, it's close enough not to be particularly interesting or need taking up most time on today.

Stuart Ingall-Tombs (CFO)

Thanks. I've got three more questions, and then I think we probably conclude. The third one will be for you, Andy, so I'll just give you a warning of it. Should we expect the growth of PestConnect to 25% in 2026 with commercial customers to be back-end weighted? And does this target include Terminix customers? I'll take the next two questions myself. I may not have understood the process. What are implications for U.S. listing for U.K. shareholders? We have to get approval from U.K. shareholders for a Class 1 transaction, and we also have to get approval for the issuance of shares. That's part of the process. There's no particular impact for U.K. shareholders of U.S. ADS. It's just the additional shares will be issued through that medium.

To clarify on factoring, is the GBP 20 million-GBP 40 million disclosed by Stuart on top of the GBP 21 million derecognized on the balance sheet today? That's actually why I gave the range of GBP 20 million-GBP 40 million, because yes, the GBP 40 million does and the GBP 20 million doesn't. So I'm including factored items that are on the balance sheet and factored items that are not on the balance sheet. So that's why it's 20-40. Apologies for the confusion there. George. Back to Sam's question on-

Andy Ransom (CEO)

Yeah

Stuart Ingall-Tombs (CFO)

PestConnect.

Andy Ransom (CEO)

Is it back-end weighted? Yes, it is back-end weighted. It requires momentum to build. I've made my excuses about PCB, even though we've had a fabulous year with Connect. We would have gone further if we'd had more product. Yeah, it will be back-end loaded. That's not a negative. That's absolutely fine. Yeah, we're not changing the target in terms of the fact we're gonna have a much bigger business but recognizing that there are two sorts of customers who typically want this. They are big customers in terms of where they see the need. If they've got large properties, warehouses, distribution centers, pharmaceutical factories, large complex customers. To be clear, Terminix doesn't have a lot of those.

There's lots of the SME where we're developing a PestConnect offering for SME, and that's going down really, really well. Yeah, we will include the Terminix SME commercial customers, and we will go after that as part of the 25% of the enlarged customer base. Yeah, it's gonna take us a bit of time to get up the curve from where we are. We'll have a decent first half. We should accelerate in the second. We should really be rocking and rolling when we get into 2023, assuming the supply chains are not further disrupted.

Stuart Ingall-Tombs (CFO)

Good. Thank you very much.

Andy Ransom (CEO)

We didn't manage to get answers out to everyone's question there. I'm delighted you've got so many. We'll be hanging around here for a bit. If you wanna have a chat and if any of you want to contact us, Catherine's off with COVID, but she'll be back shortly. Give her a call or reach out to us and we'll try and answer anything we didn't get to today. Thank you all very much.