Rentokil Initial PLC (LON:RTO) has announced its third quarter trading update.
Continued good progress on Group strategy and the integration of Terminix; Softer consumer demand environment in North America, with broad-based strength elsewhere
| AER1 | CER | |||||
| Q3 2023£m | Q3 2022£m | Change | Q3 2023£m | Q3 2022£m | Change | |
| Revenue | 1,382 | 901 | 53.3% | 1,404 | 878 | 59.9% |
Unless otherwise stated, financials relate to Q3 2023 and are stated at constant exchange rates.
The Group delivered a good overall performance in the third quarter. Revenue growth of 59.9% reflected the benefit of M&A including Terminix and Organic Revenue2 growth of 4.3%. We continued to successfully execute on our pricing strategy to recover input cost inflation.
Regional Overview
In North America, Organic Revenue increased by 2.2%. Pest Control recorded organic growth of 2.3% with the US products wholesale distribution business down 2.5% in the quarter, reflecting lower demand for chemical products for use in pest control and in turf and ornamental end markets. North America Pest Control services for commercial, residential and termite customers delivered organic growth of 2.7%. While customer retention rates remained resilient, new residential customer acquisition was challenged by the macroeconomic backdrop and a softer consumer demand environment. This was reflected in the continuation of late Q2 trends in pest control digital search volumes experienced that reduced lead flow. In the third quarter, our Employer of Choice programme has delivered further improvement in North America colleague retention, led by technician roles.
In other regions, which combine both growth and emerging markets, the Group has driven a sustained strong performance, benefiting from its excellent customer relationships, service quality and attractive structural growth drivers, leading to Organic Revenue growth of:
| ● | 9.5% in Europe (inc. Latin America), the Group’s second largest region; |
| ● | 8.9% in Asia & MENAT; |
| ● | 7.6% in Pacific; and |
| ● | 5.2% in the UK and Sub-Saharan Africa, which despite persistent macro headwinds strengthened on its H1 performance |
Business Category Overview
At the business category level, Pest Control delivered a 3.8% increase in Organic Revenue (Revenue +81.2%), with relative softness in North America offset by broad-based strength elsewhere. Our Hygiene & Wellbeing business, supported by continued good demand for washroom services, sustained its momentum in the third quarter, with Organic Revenue up 5.7% (Revenue +7.0%). France Workwear also enjoyed another strong period with Organic Revenue up by 12.2% (Revenue +12.2%).
Terminix Integration and M&A
Delivery of the Terminix integration plan has progressed well in the third quarter and the cost synergy programme is on track to meet full year guidance of $60m of pre-tax net P&L synergies. In the period we completed several important initiatives, including moving all of our 22,000 US colleagues onto the same Human Capital Management and payroll system. We remain confident in the significant benefits of the combination with Terminix and are on course with our integration plans.
The Group has completed 31 bolt-on acquisitions in the nine months to the end of September with annualised revenues of c.£86m. In the third quarter we completed 7 deals – 6 in Pest Control and 1 in Hygiene & Wellbeing, with annualised revenues of c.£7m. This includes highly targeted acquisitions to support expansion in growth ‘Cities of the Future’, including those in Indonesia, China and Brazil. We continue to execute on a substantial pipeline of additional, high-quality opportunities.
Outlook
The Terminix integration programme continues apace and we remain firmly on course to deliver our full year pre-tax net cost synergy guidance of $60m year over year. In North America, we remain mindful of the macroeconomic backdrop. Near-term market uncertainty means that the region’s full year performance is anticipated to be marginally below our previous expectations. Reflecting the impact on revenue, we now anticipate regional Adjusted Operating Margin to be in the range of 18.5%-19.0%.
Overall, we expect to achieve good growth in the Group in the remainder of 2023. We continue to believe that the benefit of our diversified portfolio and strong H1 performance will enable us to deliver Group results broadly in line with current expectations. Our sustained focus on managing inflationary pressures means we remain on track to meet our full year guidance to grow Group Adjusted Operating Margin to c.16.5%. This includes a H2 margin performance in Hygiene & Wellbeing in excess of 19.0%, as set out at the Interim announcement.
The Group remains strongly cash generative, supporting its effective reduction in debt. We reiterate previous guidance to achieve c.3x net debt to EBITDA by the end of the year.
Commenting on today’s trading update, Andy Ransom, Chief Executive, Rentokil Initial said:
“The Group delivered a good overall performance in the third quarter. We have a proven, effective strategy to deliver organic growth, focused on strong customer relationships and service quality. In addition, the portfolio effect of our global business operating in multiple markets enables us to weather regional headwinds. The strong fundamentals of our operations are further enhanced by our value-creating M&A programme, led by the integration of Terminix. We are making good progress on the transformation journey and remain confident about the significant value-enhancing benefits.”
1AER – actual exchange rates; CER – constant 2022 exchange rates.
2 Organic Revenue growth represents the growth in Revenue excluding the effect of businesses acquired during the year and, unless stated otherwise, excludes COVID disinfection. Acquired businesses are included in organic measures in the year following acquisition, and the comparative period is adjusted to include an estimated full year performance for growth calculations (pro forma revenue). The Terminix acquisition is treated differently to other acquisitions for Organic Revenue growth purposes. The full pre-acquisition results of the Terminix business are included for the comparative period and Organic Revenue growth is calculated as the growth in Revenue compared to the comparative period. This differing treatment for Terminix will expire at the end of 2023 when we will have full year Terminix comparatives. Organic growth has no equivalent GAAP measure and is presented to help understand the element of revenue growth that does not relate to acquisition activity.
