REG - Rentokil Initial PLC - Q3 Trading Update

Rentokil InitialAnnouncement

01/11/2022 07:00

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RNS Number : 8145E  Rentokil Initial PLC  01 November 2022

1 November 2022

 

RENTOKIL INITIAL PLC - THIRD QUARTER TRADING UPDATE

INCLUDING TERMINIX Q3 UPDATE & FULL YEAR TECHNICAL GUIDANCE FOR THE
COMBINED GROUP

 

 

 £m                                              Q3 2022  Growth
                                                 AER      AER    CER

 Ongoing Revenue(1)                              900.9    18.9%  10.4%
 Ongoing Revenue excluding disinfection          897.0    20.4%  11.7%
 Revenue                                         901.3    18.9%  10.3%

 

 

OVERVIEW OF RENTOKIL INITIAL Q3 PERFORMANCE (CER)

 

Q3 saw continued momentum in our businesses with Group Ongoing Revenue,
excluding disinfection services, increasing by 11.7%. Organic Revenue(2),
supported by good price progression, was up 6.2%, while acquisition-led growth
was 5.5%.

 

Ongoing Revenue in Pest Control increased by 12.6%, sustaining the growth
rates delivered in H1. Organic Revenue was up 5.0%, Organic Revenue growth in
North America Pest Control (up by 3.5%) got off to a slow start in the quarter
against strong comparatives in the prior year (up by 9.8%). Despite the
impacts of Hurricane Ian in the last week of September, the quarter finished
well. Our Hygiene & Wellbeing business also performed well during the
quarter, underpinned by good growth in core washrooms. Ongoing Revenue,
excluding disinfection services, increasing by 7.9%, of which 7.3% was
organic. Sales from disinfection services have reduced in line with our
expectations at £3.6m, £8.6m lower than the same period last year. Due
predominantly to post Covid recovery, Ongoing Revenue and Organic Revenue in
France Workwear grew strongly by 17.1%.

 

Rentokil Initial plc (the "Company" or "Rentokil Initial") has continued to
successfully manage inflationary pressures on its cost base through pricing
and cost control actions, and maintains its full year outlook for the
underlying business. Terminix delivered an excellent organic growth
performance for the quarter comparable to Rentokil Initial. The expected
impact of the Terminix transaction on revenues and profits are laid out below.

 

M&A

 

We acquired 12 Pest Control businesses in the quarter with annualised revenues
of c.£26.7m. For the year to 30 September 2022, we have acquired a total of
43 businesses (38 in Pest Control and 5 in Hygiene and Wellbeing), with
annualised revenues of c.£95.1m. Our M&A pipeline going into Q4 and 2023
remains strong and we remain on track to spend (excluding Terminix)
approximately £250m in 2022.

 

Commenting on today's announcement Andy Ransom, Chief Executive, said:

 

"This has been another good quarter for Rentokil Initial. Supported by the
essential nature of our services and ability to offset cost inflation through
pricing, we continue to deliver both good growth and profitability, while
retaining high levels of customer and colleague retention.

 

"We are delighted to have closed the Terminix transaction in October and we
extend our thanks to everyone who helped us reach this milestone. We have hit
the ground running in execution of our integration plans to capture the
strategic and financial benefits of the deal. Our cost synergy programme is
progressing well with c.$20-$25m of annualised synergies expected to be
realised by year end."

 

COMPLETION OF TERMINIX TRANSACTION

 

The Terminix transaction was completed on 12 October 2022. It brings together
two complementary businesses (the "Combined Group") to create the global
leader in pest control and hygiene & wellbeing, and the leader in pest
control in North America, the world's largest pest control market. The
combination will generate meaningful synergies. It delivers an enlarged
platform for profitable growth, supported by an attractive financial profile
that will deliver further investment in innovation and technology, and
acquisitions.

In accordance with the transaction agreement, Rentokil Initial issued
c.645.71m new Rentokil Initial shares (representing c.129.14m American
Depository Shares, based on a 1:5 ADS to Rentokil Initial share ratio). This
is in addition to the $1.34bn cash element of the transaction consideration.
Full details of the consideration are explained below.

 

Management and Board Changes

 

As announced on 6 October, Brett Ponton, CEO of Terminix, has been appointed
CEO of the Combined Group's North America region. John Myers, Managing
Director of Rentokil North America, has been appointed CEO of the US Pest
Control business, reporting to Brett. Both appointments became effective from
completion of the transaction. Brett became a member of the Combined Group's
Executive Leadership Team from the same date.

 

In addition, David Frear, formerly Non-Executive Director of Terminix since
January 2021, has been appointed to the Combined Group's Board of Directors as
a Non-Executive Director with effect from 12 October. David became a member of
the Remuneration and Nomination Committees.

 

OVERVIEW OF TERMINIX Q3 PERFORMANCE (CER)

 

During Q3, Terminix US Pest Control saw particular strength in the residential
and termite businesses. Consequently, Terminix delivered an organic growth
performance for the quarter comparable to Rentokil Initial group, constituting
Terminix's strongest quarterly performance since 2014.

 

FY 2022 TECHNICAL GUIDANCE FOR THE COMBINED GROUP

 

All guidance on the Combined Group provided is based on information we have
received in good faith from Terminix during the Form F-4 and the combined
shareholder circular and prospectus (the "Circular and Prospectus") processes
and since their completion. Whilst we have sought to apply reasonable checks
to this data, the reported results will be audited by PWC during the period
between completion and March 2023.

 

Reported full year 2022 results of the Combined Group will comprise the
underlying Rentokil Initial business and a contribution from Terminix for the
period from completion on 12 October 2022 to 31 December 2022 (the "Stub
Period"). We have measured this Stub Period as the number of calendar days.
Including 12 October, the Stub Period represents 81 days or c.88% of the
calendar days in the fourth calendar quarter of 2022, and the same in the
comparative period of 2021.

 

We will continue to report the results of the Combined Group at both Constant
Exchange Rates (CER) and Actual Exchange Rates (AER). We will therefore report
the Revenues and Adjusted Operating Profits of the Terminix entities for the
Stub Period in the same way. As an example, the CER Stub Period results of the
US Dollar denominated entities of the Terminix Group, representing c.95% of
the acquired group, will be translated at an exchange rate of $1.3739 to £1.
At year end we will also report results at AER, calculated using the average
monthly exchange rates for the year.  We will not know the AER rates and the
full results of the Group until post 31 December 2022; as such all GBP
guidance in this statement will be quoted using CER rates.

 

The significant bridging items between the definitions of Terminix EBITDA
profits and Rentokil Initial's APBITA profit metric are the deduction of
charges for depreciation and share based payments. Further discussion below
explains the impact of the applicable standard changes from the US GAAP
standards applied to the historical results of Terminix and IFRS standards
that will be applied going forward.

 

In May 2022, Terminix announced it had completed the divestment of its pest
management businesses in the UK and Norway, satisfying one of the closing
conditions to the transaction. For the financial year 2021, the divested
operations had Ongoing Revenue of $52.7m (£38.4m at CER) and contributed
Adjusted Operating Profit of approximately $6.1m (£4.4m at CER).

 

As a result of the transaction, sales of pest control products that have
historically been made by Terminix to Rentokil, which were reported as
external sales, will now need to be reported as internal sales and this would
lower the Revenue of Terminix on a proforma basis for 2021 by $6.4m (£4.7m at
CER). Equivalent sales in 2022 are estimated to be approximately $8m.
Reciprocal trading resulted in sales from Rentokil North America to Terminix
totalling $403k in 2021 with no material change in 2022. The net impact on
Stub Period Revenue is expected to be c.$1.8m (£1.3m at CER). There are no
identified material intercompany transactions outside of North America. The
reclassification of these revenues has no material impact on reported profits,
but will impact organic revenue growth percentages as the actual intercompany
revenues will be excluded from 2022 and 2021 reported revenues for the
purposes of the calculation.

 

After adjusting for both divestments and intercompany trading, Terminix
Revenue and APBITA profits in the equivalent 81 day Stub Period in 2021 were
revenues of approximately $414m (£301m at CER) in Ongoing Revenue and $42m
(£31.0m at CER) in Adjusted Operating Profit (APBITA). These numbers exclude
the impact of deal related costs of $7m included in the reported trading
profits of Terminix for Q4 2021 that would be reported outside of Adjusted
Operating Profit using Rentokil Initial definitions.

 

Synergies

 

Rentokil Initial announced in December 2021 that it expected the Combined
Group to generate material annual pre-tax net cost synergies of at least $150m
by the third full year post completion. It was also estimated that
approximately $45m (c.30%) of these net cost synergies would be delivered in
the first 12 months post completion.

 

We estimate that c.$20m-$25m of annualised synergies will be achieved on a run
rate basis by 31 December 2022 and that the actual Adjusted Operating Profit
contribution from these synergies in the Stub Period will be approximately
$4.1m (£3.0m at CER).

 

Significant work around the cost synergy programme has already taken place
over the last 10 months and continues at pace. We have made good progress and
will provide an update on expected synergies to the market at the time of our
FY 2022 results in March 2023.

 

Accounting Adjustments under IFRS

 

In the proforma section of the Form F-4 and Circular and Prospectus, the
expected conversion changes from US GAAP to IFRS were presented alongside the
impacts of any purchase price adjustments and the impact of those changes on
the Balance Sheet and Profit and Loss for the 12 months to 31 December 2021
and the 6 months to 30 June 2022.

 

In the period to 31 December 2022, we will seek to materially finalise these
adjustments and will update fully on their impacts at the Preliminary Results
in March 2022 when the results and acquisition accounting will have been
audited. Below we lay out the impact of material changes in the Stub Period
based upon the information gained up to completion, noting that we have not
identified any significant changes from information provided in the proformas.

 

In the Form F-4 and Circular and Prospectus the most material adjustment
required to be made to Terminix's standalone numbers as a result of the change
to IFRS standards related to the treatment of termite provisions.

 

Under its accounting policy, Terminix provided for termite damage claims
expected in the period up to one year after the balance sheet date. However,
under its IFRS based policy, Rentokil Initial records all probable future cash
outflows arising from claims relating to the entire pool of existing
contracts. Rentokil Initial has therefore recognised a preliminary incremental
provision of $265m (£192m at CER) as part of the opening Balance Sheet
adjustments, on top of the existing provisions of $81m (£59m at CER) as at 30
September 2022. Going forward, the income statement will show a non-cash
increase in Adjusted Operating Profit reflecting legacy claims, which will now
be booked against the increased provision, net of provision charges for
potential future claims booked against revenues for new customers signed up
post completion. As a result of these accounting changes, we estimate that the
net impact of these non-cash accounting changes in the Stub Period to be a
c.£10m at CER (c$14m) increase to Adjusted Operating Profit. All other
changes resulting from the changes in standards are not expected to have
either a gross or net material impact in the Stub Period.

 

Overall, the impact of the accounting adjustments and in period effects of
synergies delivered is expected to increase Adjusted Operating profit by
c.£13m.

 

Purchase Price Allocation

 

The total consideration for the transaction has been confirmed as 645,706,920
shares issued at a value of £4.6523 (equivalent to $5.14 at the Reuters spot
rate on 12 October 2022 of $1.1105 USD to GBP) representing £3,004,022,304 of
consideration in the form of shares alongside £1,204,524,362 ($1,337,624,304
at 12 October 2022 spot rate) of cash consideration giving a total
consideration of £4,208,546,666 ($4,673,591,073). There will be some final
adjustments made to consideration in relation to share plans and we will
update on these in March 2023. Ultimately the difference between total
consideration and final fair value of net assets acquired will be booked as
goodwill.

 

Whilst final purchase price allocations have yet to be completed - based on
the pro forma calculations as at June 30, 2022, as reported in the final Form
F-4 and Circular and Prospectus, we would expect to incur an incremental
£10m-15m of amortisation in the Stub Period, relating to the fair value of
brands, customer lists and other intangibles recognised as part of the
transaction.

 

Deal Related Costs

 

The impact of deal related costs in Rentokil Initial for 2022 and in the Stub
Period in Terminix relating to the Terminix transaction, primarily comprising
advisory fees, restructuring and redundancy, is expected to be c.£75-85m of
which c.£20-25m will be reported against Share Premium as share issuance
costs.

 

In achieving the total synergies of at least $150m as guided in December 2021,
the Combined Group expected to incur cash implementation costs of
approximately $150m, with half of this amount incurred in the first 12 months
post completion. Integration costs in the Stub Period are expected to be in
the range of $20m-$25m (£15m-£18m at CER) in line with the above synergy
guidance. Deal related acquisition costs and integration costs will be treated
as exceptional items, alongside costs for the other M&A transactions
completed in the year.

 

Overall cash costs of exceptional items in the full year are expected to be in
the range of £100m-£115m with c.£20m-£25m recorded against Share Premium.

 

Financing Costs

 

In June 2022 Rentokil Initial successfully issued three bonds: €850m 5-year
at 3.875%; €600m 8-year at 4.375%; and £400m 10-year at 5.0%. These bonds
fully cover the $1.34bn cash element of the transaction consideration. The
balance of the bonds alongside the Company's $700m three year loan covers the
refinancing of Terminix debt and transaction costs.

 

As at 30 June 2022, Terminix held two bonds: $186m notes maturing in 2027 at
7.45% and $48m of notes maturing in 2038 priced at 7.25%; and a Senior Secured
Term Loan facility maturing in 2026 priced at 3.365%. The term loan facility
was settled on 12 October 2022 and the notification of redemption to bond
holders for both maturities was issued on 6 October 2022 with a redemption
date of 7 November 2022. Following closing of the Terminix transaction,
S&P affirmed Rentokil Initial's BBB investment grade credit rating with a
stable outlook.

 

As a result of the above changes, the updated full year adjusted interest
charge to P&L will be in the range of c.£50m-£55m. This updated guidance
is c.£20m-£25m higher than indicated at H1 reflecting c.£44m of interest
charges relating to the new financing, c.£2m relating to the final holding
costs of Terminix's pre-acquisition debt and a c.£20m offsetting reduction
from the impacts of hyperinflation accounting. Our operations in Lebanon,
Argentina and Turkey are reported under hyperinflationary accounting during
2022, with full year total hyperinflation impacts expected to be in the range
of £27m-£35m (2021: £5m for 6 months of Lebanon) depending on the rate of
CPI increases in those markets. Cash interest for the full year 2022 is
expected to be in the range of £30m-£35m.

 

As a result of the funding activities completed in June 2022 and Terminix
funding actions to be completed post transaction as described above, the
Combined Group is expected to have c.85% of its bond and loan financing on
fixed interest rates. We expect Net Debt to be in the range of £2.3bn-£2.4bn
depending on exchange rates at 31 December 2022 and assuming we achieve the
targeted £250m of M&A deals spend in 2022.

 

Foreign Exchange

 

In July, the Company estimated a full year P&L benefit from foreign
exchange of £10m-£20m, provided that rates remained at consistent levels.
Based on prevailing foreign exchange rates, the Company's estimated positive
impact is now c.£20m, excluding Terminix. For the Terminix results in the
Stub Period, the positive estimated impact will be in the range of £5m-£10m.
Guidance for foreign exchange impact in FY 2023 will be provided at our
Preliminary Results in March 2023.

 

Following the transaction completion, more than 60% of Rentokil Initial
revenues are United States Dollar denominated.

 

 

The Company will host a sell side analyst modelling session on technical
accounting adjustments today, 1 November 2022 at 2.30pm GMT. No new material
non-public information will be provided at the session.

 

 

Enquiries:

 

 Investors / Analysts:  Peter Russell, Rentokil Initial plc   +44 (0)7795 166506
 Media:                 Malcolm Padley, Rentokil Initial plc  +44 (0)7788 978199

 

 

Ongoing revenue, ongoing revenue excluding disinfection, organic revenue and
adjusted operating profit and are non-GAAP financial measures. Management
believes these non-GAAP financial measures are helpful in understanding the
Group's past financial performance and future results. Management regularly
uses a variety of financial measures that are not in accordance with GAAP for
forecasting, budgeting and measuring financial performance. The non-GAAP
financial measures are not meant to be considered in isolation or as a
substitute for comparable GAAP measures. While the Company believes that these
non-GAAP financial measures provide meaningful information to help investors
understand the operating results and to analyse the Group's financial and
business trends on a period-to-period basis, there are limitations associated
with the use of these non-GAAP financial measures. These non-GAAP financial
measures are not prepared in accordance with GAAP, are not reported by all of
the Group's competitors and may not be directly comparable to similarly titled
measures of the Group's competitors due to potential differences in the exact
method of calculation.

( )

(1)Ongoing Revenue excluding disinfection removes revenues from disinfection,
a short term revenue stream created in response to the pandemic which has
tapered as we exit the pandemic is used to allow users of the statements to
understand the trajectory of the strategic segments of the Group without the
distortion of this short pandemic related revenue stream.

 

(2)Organic Revenue growth represents the growth in Ongoing Revenue excluding
the effect of businesses acquired during the year.

 

AER - actual exchange rates; CER - constant 2021 exchange rates

 

 

Cautionary statements regarding forward-looking statements

 

This announcement contains statements that are forward-looking and are made in
reliance on the safe harbour provisions of the US Private Securities
Litigation Reform Act of 1995. Forward-looking statements can sometimes be
identified by the use of forward-looking terms such as "believes," "expects,"
"may," "will," "shall," "should," "would," "could," "potential," "seeks,"
"aims," "projects," "predicts," "is optimistic," "intends," "plans,"
"estimates," "targets," "anticipates," "continues" or other comparable terms
or negatives of these terms, but not all forward-looking statements include
such identifying words. Forward-looking statements are based upon current
plans, estimates and expectations that are subject to risks, uncertainties and
assumptions. Should one or more of these risks or uncertainties materialise,
or should underlying assumptions prove incorrect, actual results may vary
materially from those indicated or anticipated by such forward-looking
statements. The Company can give no assurance that such plans, estimates or
expectations will be achieved and therefore, actual results may differ
materially from any plans, estimates or expectations in such forward-looking
statements. Important factors that could cause actual results to differ
materially from such plans, estimates or expectations include, amongst other
things:

 

 ●    risks related to the Company's acquisition of Terminix, including, amongst
      other things, the transaction not being accretive to the Group's earnings per
      share;
 ●    the risk of unsuccessfully integrating acquisitions (including the acquisition
      of Terminix);
 ●    the risk of disposals resulting in unexpected costs or liabilities;
 ●    the risk of difficulties integrating, streamlining and optimising IT systems,
      processes and technologies;
 ●    the risk of not being able to attract, retain, develop or recruit a skilled
      and qualified labour force or key management personnel;
 ●    risks related to ESG matters, including those related to climate change and
      sustainability;
 ●    risks related to inflationary pressures, such as wages, fuel prices and other
      operating costs;
 ●    the risk of supply chain issues;
 ●    the risk of weakening general economic conditions, including rising
      unemployment or decreased consumer confidence or spending levels;
 ●    the risk that the Company may not be able to successfully implement its
      business strategies, including achieving its growth objectives;
 ●    the risk of not retaining existing customers or attracting new customers;
 ●    risks related to competition in the industries in which the Group operates;
 ●    the risk of cybersecurity breaches, attacks and other similar incidents, as
      well as disruptions or failures in the Company's systems or data security
      procedures and those of its third-party service providers;
 ●    the risk of extraordinary events that could impact business continuity;
 ●    the risk that the Company may not be able to adequately protect its
      intellectual property and other proprietary rights;
 ●    risks related to the Company's reliance on third parties, including
      third-party vendors for business process outsourcing initiatives, investment
      counterparties and franchises;
 ●    the risk that the Company could fail to establish or maintain effective
      internal control over financial reporting;
 ●    the risk of impairment charges, asset revaluations or downgrades;
 ●    risks related to legal and compliance matters, such as, amongst other things,
      government regulations and enforcement; litigation; compliance with
      environmental, health and safety laws and regulations; and changes in tax
      laws; and
 ●    risks related to the Group's financing, such as, amongst other things, adverse
      credit and financial market events; the agreements and instruments governing
      the Group's indebtedness; a lowering or withdrawal of the Group's ratings or
      outlook; and an increase in interest rates.

 

Forward-looking statements speak only as of the date they are made and no
representation or warranty, whether expressed or implied, is given in relation
to them, including as to their completeness or accuracy or the basis on which
they were prepared. Other than in accordance with the Company's legal or
regulatory obligations (including under the Listing Rules and the Disclosure
Guidance and Transparency Rules), the Company does not undertake any
obligation to update or revise publicly any forward-looking statement, whether
as a result of new information, future events or otherwise. Information
contained in this announcement relating to the Company or its share price, or
the yield on its shares, should not be relied upon as an indicator of future
performance. Nothing in this announcement should be construed as a profit
forecast.

 

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