Rentokil Initial plc (LON:RTO) has issued a Trading Update for the three months of the 2024 financial year covering the period 1 July 2024 to 30 September 2024.
| AER1 | CER | |||||
| Q3 2024£m | Q3 2023£m | Change | Q3 2024£m | Q3 2023£m | Change | |
| Revenue | 1,382 | 1,382 | 0.0% | 1,444 | 1,394 | 3.6% |
Unless otherwise stated, financials relate to Q3 2024 and are stated at constant exchange rates.
· Group Revenue growth of 3.6% with Organic Revenue growth of 2.6%, including continued strength in Europe, UK and Asia
· North America Organic Revenue growth of 1.4% and North America Pest Control Organic Revenue growth of 1.4%
· Action plans to increase North America organic growth and rebalance the cost base have been strengthened since the September Trading Update
· The Terminix integration continues to go well. After a busy period in Q4 when we will be piloting new pay plans and new satellite branches, there will be a review early in the New Year to assess elements of the programme, delaying the timing of synergy delivery by about 2 to 3 months while the review is completed
· FY 24 revenue and margin guidance unchanged
· BBB (stable) rating reaffirmed by Fitch Ratings. Year-end leverage expected to be unchanged at 2.8x
Andy Ransom, Chief Executive of Rentokil Initial plc, said:
“The Group delivered Organic Revenue growth of 2.6% in Q3, with strength in the International business2. In North America, we recognise the business has underperformed and we are focused on delivering the operational improvements required. We are expanding our initiatives to increase organic growth and we are taking action to mitigate cost overruns.
“The Terminix integration continues to progress well and we have a full programme of activity for the remainder of 2024. In the New Year, we will review the early results of new Q4 integration activities, including the piloting of new satellite branches, and new technician and sales pay plans, in addition to assessing the effectiveness of our expanded growth initiatives. Post integration, we remain strongly optimistic that our business will lead a highly resilient, growing market.”
North America Business
Q3 Performance
· Organic Revenue growth was 1.4% (1.3% year to date). Both Pest Control and Pest Control Services for residential, termite and commercial customers were up 1.4%.
· North America customer retention slightly increased in the period to 79.9%. Our pricing activities continued to be successful in passing cost inflation to our customers.
· After disappointing inbound digital lead flow in July and August, lead volume markedly improved in the second half of September. This was offset throughout Q3 by a slightly lower sales close rate and average dollar value for these leads.
· North America colleague retention increased further to 78.5% (30 June 2024: 77.8%), with improvement in both sales roles (up 0.4ppts to 70.6%) and service roles (up 1ppt to 75.3%).
· The North American leadership team has been strengthened, with a new Chief Marketing Officer and Chief Operating Officer appointed. The North America Chief Financial Officer left the business and the role is being covered on an interim basis by a senior finance colleague from within the Group, pending the appointment of a full time successor.
Growth Initiatives
We are implementing our Right Way 2 plan to increase organic growth. We continue to enhance our sales and marketing approach, and are giving greater focus to customer retention as another important element to unlocking growth.
· Organic search leads. Whilst we have seen a recent positive improvement in digital inbound lead flow, this is coming from our paid search activities supporting the Terminix brand in particular. In Q4, we are looking to deliver improved leads for a number of our other important brands, while also increasing lead generation from our organic search initiatives.
· Satellite branches. From Q4 2024, we will be piloting the opening of at least 10 new satellite branches in key metro areas, to assess the value of a physical presence to the visibility and digital presence of our brands and services.
· High performance culture. There will be increased focus and accountability on executing the selling “basics”: speeding up response times to the leads that we generate (“speed to lead”), improving the likelihood of conversion; increasing the average number of sales proposals per day; increasing managers’ engagement with sellers; and driving increased sales forecast accountability.
· Customer experience and retention. We’re driving continued improvements at all phases of the customer experience, from onboarding to renewal, supported by an analytics upgrade to gain better insights into behavioural data. We are adding three senior leaders in the customer experience space, in addition to the 40 team members that have been added to the dedicated Customer Saves team.
Cost Base
As stated at our September Trading Update, we expanded resources in the North America business ahead of the peak season to deliver our planned growth. With lower volumes than planned, the business has been faced with the challenge of lower density that will continue until organic growth improves. Given our elevated workforce costs this year, we have more tightly managed overtime and labour as we entered the off season. Since the September Trading Update there has been a reduction in our sales, service and G&A headcount of c.250 (c.$22m of annualised cost), in addition to normal ongoing seasonal headcount adjustments.
Material and consumable costs in the North America business have been higher than expected, partly due to inflation. There was also an impact from a new ordering process for Terminix branches and a weaker termite season that resulted in elevated inventory. To help mitigate some of these effects, strict ordering controls at Branch Manager and Regional Director levels have now been implemented. Some additional cost due to inflation is expected to persist (c.$7m on an annualised basis). C.$10m of material and consumable costs are expected to unwind during Q4 2024 and next year.
Terminix Integration
The integration programme proceeded to plan in Q3. Systems and data were migrated for another 28 branches with combined revenues of $136m (a total to the end of Q3 of 36 branches with revenue of $172m). At these locations, there was minimal disruption to operations, with customer retention stable and colleague retention remaining strong. We also migrated Terminix National Account customers to the common systems platform, ensuring consistent service delivery and streamlined account management for our key customers. Lessons learned from migrations have been incorporated into our Integration Playbook, designed to ensure continuous improvement and efficient execution of future migrations.
We are now in a very busy and important period for the integration. Systems migration will continue for approximately 23 more branches with a total revenue of c.$130m. For the first time we also commence rerouting and piloting of our new sales and service pay plans, to initially cover 8 branches encompassing over 250 technicians and about 40 sales colleagues. As we embark on this phase, we take confidence from our rigorous planning and the Group’s extensive experience of branch integration.
This past year our company has experienced significant change activities as we have implemented our integration and Right Way 2 Growth strategies. While we remain confident that these strategies will lead to a stronger, faster growing organisation, during Q1 2025 we will review our optimal branch network footprint, which will be informed by the early results of the new satellite branches that will be opened during Q4 2024. We will also review the effectiveness of the new technician and sales pay plans. The review will result in 2025 synergies being pushed out by approximately 2 to 3 months and we will update the market on this review at the Preliminary Results in March.
North American Pest Control Market
The North American pest control market, representing around half of the global market for pest control services, remains an extremely important and exciting market, which we estimate continues to grow at around 4.8% p.a. (CAGR 2024 – 2028)3. Whilst focused on the integration of Terminix and Right Way 2 growth plan, we remain strongly optimistic that post integration our business will lead a highly resilient, growth market.
Regional and Category Performance
Good momentum in Organic Revenue growth was sustained in Q3 in the Group’s other regions:
International business (Group excluding North America): +4.4% (+5.0% year to date)
· Europe inc. LATAM: +4.7% (+5.4% year to date)
· UK & Sub Saharan Africa: +4.2% (+4.8% year to date)
· Asia & MENAT: +6.5% (+5.4% year to date)
· Pacific: +0.6% (+2.9% year to date). Our rural pest control was impacted by adverse weather and there was deferral of jobs in track spray weed control operations
Organic Revenue growth across all categories:
· Pest Control +2.2% (+2.2% year to date)
· Hygiene & Wellbeing +2.9% (+3.9% year to date). Good underlying performance in the UK and Europe, held back by Australia, which lapped strong prior year comparatives, and the non-repeat of credit note releases in the UK in the prior-year
· France Workwear +7.4% (+7.5% year to date), delivering another strong quarter
M&A
· The Group’s bolt-on M&A programme continued to create value with 5 deals, delivering annualised revenue in the year before acquisition of £39m. M&A spend for the full year is now expected to be c.£200m.
Balance Sheet
· BBB (stable) rating reaffirmed by Fitch Ratings, which post-dates and reflects the information provided in the September Trading Update. The Company is also BBB (stable) rated by S&P Global.
Board
· As previously announced, Mr Brian Baldwin, the Head of Research of Trian Fund Management, L.P., has joined the Board as a Non-Executive Director.
· The Board has also started the process to appoint at least one further Non-Executive Director with specific experience in US network-based services industries and/or business-to-consumer digital marketing.
Outlook
· There is no change to the 2024 guidance provided at the September Trading Update. Whilst we see opportunities for organic performance to improve in H2 2024, our North America guidance for the period remains c.1%. FY 2024 North America Adjusted Operating Profit margin is anticipated to be c.17.2% and Group Adjusted Operating Profit margin to be c.15.5%. FY 2024 Group Adjusted PBTA is expected to be c.£700m.
· The Group’s Net Debt to EBITDA leverage is expected to be unchanged at c.2.8x at year end.
· FY 2025 profit and margin will be affected by the timing of synergy delivery, expected to be pushed out by approximately 2 to 3 months as a result of the Q1 2025 integration review period.
· The Board remains confident in the Group’s strategy and longer-term growth prospects. Notwithstanding the near-term headwinds, the long-term market opportunity remains attractive and we are confident that Rentokil Initial is very well positioned to capture this growth.
Conference call details
Today, 17 October at 9:00 am BST, Rentokil Initial Chief Executive, Andy Ransom and Chief Financial Officer, Stuart Ingall-Tombs will host a conference call for analysts and investors. There will be an additional conference call for US audiences at 1:00 pm BST. A replay will be made available on the Company website.
For the 9:00 am call: To join via teleconference use conference ID 6018644 with one of the dial-in options below. An audio webcast is accessible at https://events.q4inc.com/attendee/316615478.
For the 1:00 pm call: To join via teleconference use conference ID 9089361 with one of the dial-in options below. An audio webcast is accessible at https://events.q4inc.com/attendee/761600364.
UK: +44 20 3481 4247
France: +33 1 73 02 31 36
Germany: +49 69 589964217
Sweden: +46 8 505 246 90
Singapore: +65 3159 1234
USA: +1 (646) 307 1963
Additional international access conference numbers can be found at https://registrations.events/directory/international/itfs.html
Notes
1AER – actual exchange rates; CER – constant 2023 exchange rates
2Group excluding North America and centrally managed supply chain revenue
3Speciality Consultants, 2024
