Rentokil Initial revenue up 19.1%, driven by resilient demand

Rentokil Initial plc (LON:RTO) has announced its 2022 Preliminary Results.

Financial Results

2022 Highlights (Unless otherwise stated, all financials include Terminix from the date of transaction completion and are presented at constant exchanges rates. Organic Revenue growth figures exclude COVID disinfection.)

● Revenue up 19.1%, reflecting benefit of M&A, including Terminix, and strong Organic Revenue1 growth of 6.6%, driven by resilient demand and effective price progression. Statutory Revenue up 25.6% to £3,714m at AER. As expected, COVID disinfection revenue reduced to £20m (FY 21: £117m), with £6m in H2

• Organic Revenue growth of 5.7% in North America, with Terminix and Rentokil North America2 delivering similar rates of growth
• Organic Revenue up 9.1% in Europe, the Group’s second largest region
• Strong broad-based Organic Revenue growth across all business categories: 5.6% in Pest Control; 9.3% in Hygiene & Wellbeing; and 16.6% in France Workwear

● Adjusted Operating Profit increased 22.7%; 23.5% growth in Adjusted PBT. Statutory PBT down 9.1% to £296m at AER due to one-off and adjusting items, and interest related to the Terminix transaction

• Group Adjusted Operating Margin up 45bps to 15.4%3, the highest for 20 years
• Margin improvement driven by 26bps improvement in underlying trading performance and 19bps net impact from Terminix transaction

● Free Cash Flow of £374m leading to 91.8% Adjusted Free Cash Flow conversion

● Pro forma net debt to Adjusted EBITDA of less than 3.2x at 31 December 2022, as expected. Net debt at £3.3bn in line with Q3 guidance

● Excellent progress on Terminix integration with cost synergy guidance increased to at least $200m

• $13m pre-tax net P&L cost synergies achieved in FY 22, ahead of $4m guidance. On track to deliver a further $60m in FY 23, with total synergy target increased from at least $150m to at least $200m in FY 25
• Additional non-cash benefit of $18m in FY 22, reflecting application of IFRS accounting for termite provisions and LTIPs; a further $32m of non-cash benefits expected in FY 23

● Continued strong execution on M&A:

• 52 acquisitions (excluding Terminix) completed in 2022 for an aggregate consideration of £259m.
  Robust pipeline of high-quality M&A in place. Guidance on targeted spend in FY 23 of c.£250m

● Recommended final dividend of 5.15p to bring total dividend for 2022 to 7.55p per share, an increase of 18.2%, in line with our progressive policy

● Successful integration of Terminix and ongoing execution of our strategy will enable the enlarged Group to deliver a highly attractive investment proposition:

• Medium term Organic Revenue growth target increased to at least 5.0%
• Group Adjusted Operating Margin for FY 23 of c.16.5%, with North America Adjusted Operating Margin of c.19.5%
• Group Adjusted Operating Margin greater than 19.0% and Free Cash Flow conversion of at least 90% in FY 25
• Net debt to EBITDA of less than 3x by the end of FY 24, falling rapidly to 2-2.5x thereafter
• Continued progressive dividend policy

Andy Ransom, Chief Executive of Rentokil Initial plc, said:

“Our strong financial results, with Organic Revenue growth of 6.6%, demonstrate the resilience of our business model. We continue to successfully manage cost inflation, while driving investment in our services and people to sustain high levels of customer and colleague retention.

All of this has been achieved alongside the landmark acquisition of Terminix, reinforcing Rentokil Initial as the largest pest control company in the world. Early progress on integration has been excellent. I am especially pleased with today’s announcement of an increase in expectations for total cost synergies to at least $200m that evidences our strong conviction in the enlarged Group’s financial and strategic opportunities going forward.”

2023 Outlook

We start the new calendar year with confidence in our plans, both operational and strategic. This is underpinned by the Company’s inherently resilient business model as we continue to offset inflation with pricing and the early headway made in delivery of Terminix acquisition benefits. For the full year, notwithstanding the prevailing macroeconomic challenges, we expect continued good underlying trading momentum.

The Group’s expectations for annual pre-tax net cost synergies achievable from the Terminix acquisition are increased from at least $150m to at least $200m by the end of FY 25, with $60m of incremental pre-tax net cost synergies expected to be delivered in FY 23. In-line with the increase in annualised go-forward cost synergies, total one-time cost to achieve synergies are expected to be c.$200m. In addition, we expect to benefit from $32m of further non-cash benefits in FY 23 arising from the application of IFRS accounting of termite provisions and LTIPs.

With margin protection from continued proactive cost inflation management and margin accretion from strategy execution, synergy delivery and IFRS accounting adjustments, Group Adjusted Operating Margin in FY 23 is expected to increase to c.16.5% and North America Adjusted Operating Margin to c.19.5%.

Our anticipated spend on M&A in FY 23 is c.£250m and Free Cash Flow conversion is expected to be 80-90%, primarily reflecting the impact of accounting adjustments.

The Group remains on track to achieve mid-teens EPS accretion in FY 23.

Medium term Guidance

As a result of our ongoing operational and strategic plans, combined with the benefits from the acquisition and integration of Terminix, we are increasing our medium term guidance for Organic Revenue growth from 4.0%-5.0% to at least 5.0%. In FY 25, we expect to deliver a Group Adjusted Operating Margin of greater than 19.0%.

As the impact of accounting adjustments phases out, Free Cash Flow conversion should increase back to at least 90% by FY 25.

As previously guided, we expect leverage to be consistent with BBB rating by the end of FY 24. Net debt to EBITDA is expected to be less than 3x by the end of FY 24 and we remain on plan to deliver net debt to EBITDA of 2.0x to 2.5x in the medium term. The Group is on track for ROIC to exceed WACC by FY 25.

Our progressive dividend policy remains unchanged.