Lastly, could you please ensure your mobile phones are turned off? Thank you. Thanks. Good morning, ladies and gentlemen. Thank you all for joining us today. In a few moments, Jeremy will provide you with details of our financial results for 2018, looking at the overall performance of the group and our five regions. I'll then come back to provide an update, firstly, on our main categories, and then secondly on how we're executing our strategy through our value-creating M&A program. First, let me just say a few words to set the scene for today by covering the key highlights. We delivered a very good overall performance during the year, with revenue from ongoing operations up 13.2% at constant exchange rates. Organic revenue growth improved to 4.3% in the second half and reached 4.5% in the fourth quarter.
I'll come back to talk about Pest Control and Hygiene in more detail in a few moments. As you can see, they both had strong years. Ongoing adjusted operating profit grew by 13.3%, another very good overall full-year performance with all regions contributing. It was particularly pleasing to see our business in France return to full year profitable growth as planned. Jeremy will cover cash in more detail. A 94% cash conversion rate is also ahead of our medium-term target. Rentokil Initial has increasingly become a high-quality, resilient, and defensive global business. We now operate across 75 countries and multiple regulatory and economic zones. We have around 90% of our 2018 revenues and profits coming from outside of the U.K. In Pest Control, we now have 50 market-leading positions. Our digital and innovation programs made really outstanding progress in 2018.
For instance, we've drove an additional 5 million web sessions through our local online campaigns, and we added over 140,000 customer premises onto the myRentokil portal last year. Turning now to acquisitions. 2018 was another very good year for M&A, with 47 acquisitions, delivering GBP 170 million of combined annualized revenues. 42 of those deals were in Pest Control, 14 of which were in North America. The M&A pipeline remains very strong. We've got off to a good start in 2019, with six high-quality acquisitions completed by the end of January, of which two excellent deals were in North America, and with those two deals adding around $27 million of annualized revenues. While I'm particularly pleased with the M&A performance, our largest deal of the year was, in fact, our agreement with PIC for the buyout of our pension scheme.
This extinguishes all future liabilities and with no future cash payments being required by the company, and in fact, we'll even be getting some cash back, which is a pretty remarkable deal. 2008 was a very good year for Rentokil Initial. I'm delighted that we have again exceeded our medium-term financial targets for revenue, profit, and cash, and we are confident of delivering further progress again this year. Finally, I'm sure you've seen today's separate announcement about our chairman. I'd like to welcome Richard Solomons to the board as our new chairman. Richard is a vastly experienced and successful businessman, and we very much look forward to working with him. I'd also like to take this personal opportunity to thank John for his great support and his exemplary leadership of the board since we joined the company together back in 2008. Now, let me hand over to Jeremy.
Thank you, Andy, and good morning, everyone. I'll now run through the key financial highlights for 2018 in a bit more detail. Unless I state to the contrary, all numbers are at a constant rate of exchange. Ongoing revenue in the year grew by 13.2%, with organic growth of 3.7% and growth from acquired businesses of 9.5%. Adjusted operating profit before interest for the year on an ongoing basis increased by 13.3%, driven by good growth in all regions. Adjusted profit after interest at actual exchange rates grew by 7.4%, driven by the increase in operating profit, offset by the impact of the transfer of our German and Benelux textiles and hygiene businesses into the JV with Haniel in 2017, and adverse exchange rate movements of GBP 4 million. Free cash flow was again strong in 2018, as Andy's mentioned.
Operating cash flow at GBP 283 million was GBP 25 million higher than the prior year, and free cash flow at GBP 192 million was GBP 16 million higher. Adjusted EPS at actual exchange rates increased by 7.3%, in line with the growth and adjusted profit before tax. The revenue, profit, and free cash flow results for 2018 demonstrate another year of delivery against the financial targets that we set for the business in 2014 and which were revised upwards at the 2017 interims. Organic growth was towards the top end of our target range of 3%-4%, despite a weather-impacted first half. Our profit growth was ahead of our target level of around 10%, reflecting leverage from the organic growth, as well as the continuing impact of our M&A program. Free cash flow continues to be strong, with free cash flow conversion at 94%, ahead of our medium-term target of 90%.
Looking now at performance by region, North America delivered a good performance in 2018. Revenue grew by 12.3% in the year, driven by a continued strong acquisition pipeline, as well as organic revenue growth, which was 3.8% for the year. Pest Control delivered improved organic revenues of 5% in the second half, which was less impacted by the weather than the first half. 14 acquisitions were completed in 2018, with annualized revenues of over GBP 41 million, or $53 million. Operating profit was up 12.8%, reflecting the impact of the acquisitions and leverage from the increased organic growth. Margins improved by 0.1 percentage points to 13.7%, and I'll talk more about net margins in North America on the next couple of slides.
At our capital markets day in 2018, we set out our ambition for our North American business to become a $1.5 billion revenue, 18% net operating margin business by the end of 2020. We've made excellent progress towards our revenue target, with a strong improvement organic growth in H2 and acquisitions adding over $50 million of annualized revenues in the year. We continue to work towards our net operating margin target, and we made progress in the second half of the year, increasing margins by 50 basis points, supported by stronger organic growth and savings in property and procurement from our Best of Breed cost savings program. As we look forward, given our revenue growth expectations for the region of 12%-15% per annum, we are confident that we will deliver the 10% compound annual growth rate required in 2019 and 2020 to achieve our $1.5 billion revenue target.
To ensure that the re-platforming of the business and our deployment of the group's IT applications are delivered effectively, we have put back the date for its completion by 12 months to the first half of 2020. This impacts the timing of systems-dependent savings in areas such as service productivity and field administration, meaning that we will deliver 18% margins by 2021. Ongoing revenues in Europe were up 9.7% in the year, with strong growth in Southern Europe, Germany, and Latin America, which is managed through the Europe region. The region secured 13 acquisitions in the year, which contributed 6.2% of revenue growth. Organic growth of 3.5% was driven by strong pest performance, helped by the good weather experienced during the 2018 summer in Europe.
Ongoing profits grew by 10.4%, the best performance in the region for some time, driven by growth in Southern Europe, Germany, and Latin America. Also aided by France, which grew profits for the first time in a number of years. Our JV with Haniel is performing well in its first full year of operation. Revenue in the U.K. and the rest of the world region was up 19.5%, of which 2.8% was organic. U.K. revenues grew by 4.2% in Pest Control and 4.1% in Hygiene. However, the U.K. Property Care market has been challenging, impacting both revenue and profit margins. Ongoing revenue growth has been strong in the rest of the world, driven by growth in all of its regional clusters. Eight businesses were acquired in the region in 2018, with annualized revenues of GBP 75 million.
Ongoing operating profits increased by 15% in the year, reflecting the organic growth in Pest and Hygiene and the impact of the acquired businesses. Revenues increased by 17.7% in Asia, with organic revenue growth of 5.9% and good performance in both Pest and Hygiene, with acquisitions contributing growth of 11.8%. Operating profit in the region was up 15.1%, driven by leverage from the organic growth and the level of acquisitions. Our joint venture in Japan continues to trade well, growing revenue by 5.9% and profits by 7%. The Pacific business delivered revenue growth of 11.2%, of which 8.6% was from acquisitions and 2.6% was organic, which underpinned an increase in operating profit of 7%. The main acquisition in the year was the Cannon Hygiene Services acquisition, which operates in both Australia and New Zealand.
Operating cash flow, as I've said, of GBP 283.5 million, was up GBP 25.1 million, despite the impact of the removal of cash flows from the businesses which transferred to the Haniel JV in 2017, with lower CapEx and improved working capital flows offsetting the impact of lower EBITDA. The improved working capital was in part due to phasing at the end of 2018. Continuing free cash flow of GBP 192 million was GBP 16.2 million higher than last year. Cash interest payments were GBP 4 million higher than 2017, reflecting higher U.S. dollar interest rates and an increase in the level of net debt during the year. Cash tax payments were GBP 5 million higher, reflecting the increased profitability of the group. Our cash tax paid as a percentage of profit remains relatively low, however, at around 15%. Free cash flow was used to fund GBP 74 million in cash dividend payments, a 15.4% increase on 2017.
Spend on acquisitions amounted to GBP 298 million in 2018, GBP 17 million higher than the previous year. The impact of this overall increased the sterling value of our euro and dollar-denominated debt by GBP 43 million compared to the prior year. Taking all of the above into account, our net debt increased by GBP 226 million in the year to GBP 1.153 billion. Looking at the balance sheet in more detail, our net debt to EBITDA ratio stood at 2.4 times as at the 31st of December 2018. Our balance sheet remains strong. As the chart shows, our net debt levels are lower now than five years ago, pre-exchange movements. Consequently, the group's credit rating remains at triple B with a stable outlook.
The group had over GBP 600 million of centrally held cash and facilities at the year-end, which amongst other things, covers the refinancing associated with the maturity of the EUR 500 million bond in Q4 2019. The average cost of net debt increased slightly during 2018, reflecting higher US dollar interest rates. The average cost of net debt in 2019 will benefit from the refinancing of the euro bond, which has a coupon of 3.375%. As Andy has mentioned, the group announced a bulk annuity buy-in of its UK defined benefit pension scheme in 2018, with a view to a full buyout of the scheme. The buyout and the winding up of the scheme is expected to be completed in 2020, with an anticipated pre-tax cash surplus of between GBP 20 million and GBP 40 million.
At the year-end, the accounting surplus was written down, resulting in a non-cash exceptional accounting charge of GBP 342 million. Before I get to some guidance, I just wanted to flag the impact on our numbers of the new leasing accounting standard in 2019. The standard impacts 2019 numbers only, and does not require restatement of the 2018 figures. The core concept here is that shorter-term leases, previously known as operating leases, for assets such as motor vehicles and property will now be treated the same way as longer-term leases, previously known as finance leases. We do not know at this stage the exact impact of the standard at the moment, but we will obviously be able to provide more detail as we head through the year. We do know that there will be no impact on adjusted profit after interest.
However, we anticipate that ongoing operating profit will increase by around GBP 5 million-GBP 10 million, and this will be offset by an equivalent increase in interest costs. The new operating leases will increase the values attributed to fixed assets and net debt on the balance sheet by an estimated GBP 200 million. It will also have an impact on the accounting for cash flow items such as EBITDA, CapEx, and interest, although there is no underlying impact on the group's cash flows. In 2019, we will present our cash flow statement on the new and the old basis for comparative purposes. In terms of guidance for 2019, we've made a good start to this year, and we'd expect the underlying outperformance in 2018 to flow into 2019.
Profit and loss and cash interest costs are estimated to be in line with 2018 before IFRS changes, reflecting the expected benefit of the refinancing of the EUR bond in Q4. We estimate that our effective tax rate will be around 22% in 2019, in line with 2018. In relation to the overall FX impact on profits, the situation remains very volatile. With sterling strengthening over the last two to three days, based on current exchange rates, the impact, if it were to be maintained for the rest of the year, would be to reduce 2019 profits by around GBP 5 million. Again, we will continue to update you on the potential impact as the year progresses. Based on the above, I would expect a slight increase in market expectations for 2019. I'd now like to hand you back to Andy.
Thanks, Jeremy. Let me start then with our The Right Way plan. This is a slide that I know you've seen many times before, but it summarizes how we're managing the business. In the interest of time, I'm not going to go through it again today. It does include our medium term targets there at the bottom of the chart, and it is really pleasing to call out that once again, we have outperformed each of them. Today, though, I'm going to focus mainly on our market leading businesses in pest control and in hygiene, on our leadership in digital and innovation, and finally on our M&A agenda. Let's start with Rentokil, the world's leading pest control company. In 2018, we delivered a very good full year performance, with ongoing revenues increasing by 12.6%, of which organic growth was up by 4.8%. Profits increased by around 10%.
As you can see from the chart, this is a consistent high performer, delivering a five-year revenue CAGR of 16.2%. Pest control is our key growth engine, and it's extremely well-positioned to capitalize on the increasing demand for pest control around the world, with 85% of its revenues coming from growth markets and 15% from emerging markets. Today, Rentokil is the number one pest control company in 50 countries, and we've doubled the size of the business since 2014, and we have a strong plan to continue that growth trajectory. That plan includes building our presence in higher growth emerging markets, targeting growth through innovation and digital, creating a world leading position in Vector Control, building out our international accounts business, and of course, continuing to increase our scale in North America, where half of the world's pest control takes place.
To do so by continuing to acquire high quality pest control businesses in target cities that give us both density as well as a strong future organic growth platform. As Jeremy's already said, in North America, we're on track to reach revenues of $1.5 billion by the end of 2020, and we're confident of delivering margin expansion to 18% by the end of 2021. North America is a strong and growing pest control market, and it's ripe for a new level of innovation and digital capability. 40% of our new Lumnia insect light traps headed to the U.S. in 2018. That's a product that hadn't previously been thought possible, but we delivered it using LED lights to replace traditional fluorescent tubes. By doing so, we're reducing customers' energy consumption by around 60%.
The pest control market remains highly fragmented, with some 20,000 pest control businesses. Our reputation for customer service, for looking after our employees, and for leadership in innovation and digital are important factors in growing our M&A pipeline in North America, where, as I've said before, we believe we're typically the buyer of choice. Our focus in North America remains on new product growth in areas such as vector control, building market share through a focus on key customer sectors, on value creating acquisitions, where we've delivered 38 since the beginning of 2016, on innovation, as we increasingly deploy our new global products and services into the U.S. market, on national accounts, which again grew by 15% last year in North America. Finally, on our digital capabilities as we leverage our in-house expertise to drive higher levels of online inquiries.
In North America, we've got a clear growth plan and multiple growth opportunities. Turning now to our emerging markets business, where we've established strong positions across Asia, Latin America, Africa, and the Middle East, which are unmatched by any competitor. We delivered a good performance across the emerging markets in 2018, with growth, for example, of over 30% in Indonesia and over 20% in India as we continued to increase the digitalization of the frontline, roll out our innovations, and we also delivered 15 highly targeted acquisitions. Here, we are building an exceptional medium-term growth opportunity. Don't take just my word for it. A recent report by Oxford Economics highlighted increasing urbanization and a shift to emerging markets over the next 10 years. The report highlights 750 cities, which by 2030 will have 410 million more people and 220 million additional middle-income households.
This all plays to an increase in demand for pest control and an increasing spend per capita. The report also highlights that the 10 fastest growing cities will all be in India, and following our PCI deal, where we became the market leader, we now operate in all 10 of those cities. Turning now to innovation and digital. At the Capital Markets Day last year, we showed you a selection of the innovations in our pipeline, and we demonstrated our new Lumnia insect light trap. To date, we've sold service contracts for over 60,000 units, generating some GBP 20 million of revenues. Of course, this is recurring portfolio revenue, not one-time product sale revenue. Lumnia is a great example of our innovation capabilities.
We're setting new standards in the industry, and we've got a strong pipeline of innovations to launch this year, extending the Lumnia range, adding more sustainable products, and increasing our range of connected devices. Our digital pest control services are another way in which we differentiate Rentokil from the competition. PestConnect is now available in 18 markets around the world, and we've sent or received over 50 million messages between devices in the field and our central command center, which is where we can now even monitor service performance at a global level, a country level, a local level, and even a product level. The command center is unique to Rentokil, and it's beginning to generate real insight on how we can improve service performance to boost our efficiency and to drive sales. Let me give you two quick examples.
We can now monitor and target an increase in the number of customer recommendations that we make for each visit, but also to act on any recommendations that haven't been followed up. Many of our large multi-site customers require typically a monthly report of the activity on their estate. It used to take one person in Rentokil typically about two working days to bring together those reports from all of the stores around the country. Today, we've got 25 standard KPIs, and they're often embedded into our customers' own systems, and we can generate those monthly reports in a matter of seconds. The myRentokil portal give customers 24/7 access to details of pest activity and service delivery on their estate, as well as contract and billing details. We now have 25 million individual devices being tracked, and 84% of our commercial customers are now using this portal.
As a result, over four million customer reports were generated automatically by the customers themselves last year, and over 300,000 marketing emails were sent with new product information. This end-to-end digital platform of connected devices, a central command center, bespoke apps, customer portals is what will give us cost efficiencies as well as increased revenues through the competitive advantage that they are giving us. On Pest Control, I just want to touch on Vector Control. Twelve months ago, we said our aim was to build our capabilities in this growing market, which is worth just over $3 billion per annum. Pleased to say that we've made good progress last year.
We're now the leading provider of Vector Control services in North America through the combination of the Vector Disease Control International acquisition, which we acquired in 2017, and Mosquito Control Services, which we acquired in the second half of last year. While in Brazil, as we predicted, the market is beginning to open up to commercial providers. We put in place a great team in Brazil. We've made our submission for the very first of these public tenders, and which we understand will shortly be confirmed that we've won that first tender. I hope that's given you a good update on Pest Control. I'm just going to pick up some key points from Hygiene, then Protect & Enhance, and then close with M&A. Initial Hygiene is the world's leading commercial hygiene services business. We have top three market positions in over 30 countries.
Last year, our Hygiene business delivered an excellent performance with ongoing revenue growth of 26.5% and improved organic revenue growth of 2.8%. At the same time, profit growth of around 20% last year compares very favorably to the 5% profit decline back in 2014. Our five-year turnaround story for this business perhaps gets a little lost with the understandable focus on Pest Control, but it's had another good year with improving organic growth, excellent M&A, high levels of customer service, and customer retention also being up by half a percent. Our focus is on operational execution, which is designed to drive profitable growth through a focus on customer and product density. In particular, in 2019, we're going to be building our product range to target specific growth areas, including air care and workplace well-being.
With well-being programs now on the rise, which are designed to boost morale, reduce staff absence, and improve productivity, we see strong potential links with better workplace hygiene. Firstly, while well-being is still a relatively new concept for a lot of companies, improving hygiene facilities is a great first step, reducing the spread of germs that can lead to sickness and to absence. Secondly, we believe that the demand for premium scenting, providing bespoke air scenting ranges for hotels, for retailers, for instance, will continue to expand in line with demand for healthier and more pleasant working environments.
You can see our business has already grown from revenues of GBP 4 million back in 2015 to around GBP 18 million last year. Finally, with air quality deteriorating in many urban areas, and in particular across Asia, we see a good opportunity for air purification products, not just in the washrooms, but also outside of the washrooms, using Initial Hygiene services to deliver clean air in offices, kitchens, reception areas. We will be launching new air care products in 2019 to target this opportunity. Turning now to our third business cluster, Protect & Enhance. Here we've got the three main businesses. We've got France Workwear, Ambius, UK Property Care. Last year, we delivered a good full year performance with profits up by almost 11%, driven by service levels at almost 99% and higher levels of customer retention.
In France, where we've returned to profitable growth, we've got an excellent management team in place, we've got a clear plan, the plan is being executed successfully. The program includes a strong employer of choice agenda, digital and innovation launches, a focus on service and product quality, and on cost optimization. As you can see, it's delivered record levels of customer retention and strong colleague retention levels as well at 90%. It's too early to claim victory in France Workwear just yet, but it's been a year of very good progress, and a clear plan is in place for 2019. Our small UK Property Care business, it's got unrivaled expertise in woodworm and damp-proofing services, but it remains significantly impacted by the slowdown in the U.K. property market, and it made a small loss in 2018.
To counter the ongoing market pressures, we've put in place a business improvement plan based on better revenues, for example, by providing Pest Control services to our commercial Pest Control customers and by leveraging our digital expertise, but also on cost and efficiency measures. Based on this plan, we are expecting to see that business return to profitable growth in 2019. Finally, in Ambius, following a period of decline in profits, the business has returned to form in 2018, with revenues up 3% and profits up by 16%. We continue to focus on higher margin services across the four lines of business, which are interior planting, premium scenting, holiday decor, and large special projects. Turning now to M&A. The execution of our M&A agenda continues to be of the highest standard with 47 deals completed last year, 42 in Pest Control, and in total, delivering GBP 170 million of annualized revenues.
As you can see on the map there, the M&A agenda is active around the world with 14 deals in North America, six in Latin America, and a further nine deals in other emerging markets such as Indonesia and Malaysia. We monitor the integration and the performance of our acquired businesses very closely to ensure that they're continuing to meet our financial hurdles. As you can see there on the bottom of the page, the M&A program indeed continues to meet our expectations and to deliver in line with or above our targeted returns. This is our Right Way strategy in action. Obviously, we will continue to execute this aggressively through 2019. We have again set an indicative spend of between GBP 200 million and GBP 250 million this year. Turning finally to two areas of importance which go to the sustainability of our growth agenda.
At Rentokil Initial, we believe it's not just about delivering the numbers, but it's about how we deliver them, including how we manage our people, the services we provide to our customers, and the care that we show to the communities in which we operate. During 2018, we've made very good progress with our critically important employer of choice agenda. We've built a global careers website to bring in higher quality new recruits to reduce our time to hire. That's resulted in a 400% increase in the number of online applications per role and a 24% reduction in the time to hire. We've created over 500 new courses and videos for our U+ training platform. They had 1.2 million views during the year. We've introduced a series of standard employer of choice KPIs at a group, region, country, and local level, which we monitor every single month.
For example, in every single branch around the world, we know precisely the number of vacancies, the average number of applicants for each vacancy, the average time it takes to fill each vacancy. It's a critically important area for a business services company. We also track a key measure, which is the retention of colleagues who've been with us for less than 12 months. You can see there on the bottom of the chart, we've made very good progress in every region. Finally, we've got some high-quality independent accreditation already in the area of sustainability. But today I'm delighted to announce the formation of Rentokil Initial Cares. This is a new charitable fund.
Innovatively, this is a new program where we will be using both unclaimed shares and unclaimed shareholder dividends going back over the last 12 years, using that money to involve our 40,000 colleagues in helping support good causes around the world, all in line with our mission to protect people and to enhance lives. In summary, in 2018, delivered a very good overall performance. We made good progress in ongoing revenue, profit, and cash, exceeding those medium-term targets. We're continuing to focus on building scale and density. We delivered a much-improved second half with organic growth of 4.3%, 4.5% in the last quarter. We achieved the return to profitable growth for our Protect & Enhance businesses, in particular, our France Workwear business. We delivered scale in digital and innovation with now over 80% of all commercial pest control customers on our myRentokil platform.
We've executed M&A at pace with 47 acquisitions and a strong global pipeline of acquisitions ahead of us. Based on this very good performance, we've announced a proposed final dividend increase of 15.2%, and we are confident of delivering further progress in 2019. Thank you very much, and Jeremy and I will now be happy to take any questions.
Hi, good morning, Sylvia Barker from JPMorgan. Three questions, please. First of all, on the U.S. margins, obviously the target's being pushed back, but I guess nobody really has that in numbers anyway. Just kind of understanding the moving parts on that, because obviously it implies quite a big increase in your services margin. Could you just update us on where the pest control services margin was in 2018, if you have that? Second of all, just the Vector Control tender. From memory from your Investor Day, those were quite large potential tenders. Are there any public details that you can share in terms of potential size and timing? Finally, on the potential JV exit in 2020, is that still the base case that we should be assuming? Thank you.
Do you want to take the first one?
Yeah. You'll remember from the Capital Markets Day, the margin split up between pest services and the other businesses, the products business and Ambius. What you're seeing in 2018 is that improvement coming through the second half in pest services from the improved organic growth. We have had some benefit from our Best of Breed in less IT related areas like property and procurement. This is a backend loaded program in terms of the journey towards it. What we're looking for here is the economies we've seen elsewhere in the group, particularly in productivity and in field-based admin. What we're doing in terms of the system replatforming is getting all the systems that in terms of the business we've acquired over the last four to five years onto a common platform in each of the regions.
We're then looking to get that data into the cloud so that we can access it across the country. We're looking to put the apps in that we've put elsewhere in the group to drive those leverage Best of Breed programs. This is backend loaded, and that's why we've put it back a year. We're really being careful with the systems implementation around not wanting to break the business, because not only are you putting systems in, you're combining the processes across the group so that everybody in the west, the center, and the east are all operating the same way, and that change management is absolutely vital to delivering this. It's not only a systems piece, it's a broader operational piece. There are no particular issues. We're just being absolutely careful in terms of what we're delivering. We're still very confident of the delivery.
It's a timing issue, not a we've come across a problem A or a problem B. Those pest services margins, we're still pretty comfortable we can deliver them. We look elsewhere in the group. Europe's a great example. If we look at our European pest business and our European business as a whole and what we've done in delivering the IT platform there over the last two to three years, that, if you like, gives us the reinforces the confidence this is achievable in the U.S. once we get those systems in, Sylvia.
Morning, Sylvia. Good memory. Vector Control in Brazil, just to recap for those who don't have Sylvia's memory, it's a big potential market in Brazil, the Brazilian authorities spending around $1 billion a year to try and control the dengue problem that they have in Brazil. The current activities are carried out across the municipalities in Brazil, which is 5,500. You've got a big number divided by 5,500 and big municipalities, small municipalities. You'll also remember our plan was let us build the capability, create the team, build the scientific capability that we need to support it, and let's go see if we can win the first of the outsourcing tenders. That tender took a little bit of time to come to market, it has come to market. We have submitted. We believe we've been successful.
You'll also recall the plan was right, win the first one, do an amazing job, and use that as our marketing to go to the other municipalities and say, "Well, look, this is what you can do if you outsource." That remains our model. The team we've built down in Brazil is outstanding.Difficult to size these things. I think I told you last time the question was asked, it's either nothing or it's a very big number. We're hopeful it's going to be more than nothing. The typical size of one of these contracts, I suspect, is $1 million-$2 million something U.S. dollars, something like that. It isn't a big enough opportunity yet, I don't think, for you to be putting exotic things in your models.
If we're successful here, this will be a really, really exciting opportunity, because mosquito-borne disease is a problem which is getting worse around the world, not getting better. JV, equally, if memory is correct, we have a clear contract that we can exit or start an exit process from the beginning of 2020. That doesn't mean to say you should assume that we will. The joint venture is trading well, performing well, relationships are excellent, but the first date at which we could start an exit process would be the beginning of 2020.
Morning. Rajesh Kumar from HSBC. Just when you talk about your Pest Control M&A strategy, could you give us some color on the type of synergies you get on the supply side? Also in the world where Brexit is a concern, how much of your supply stems out of the Dudley factory or out of your various other U.K. sites, which could be supplying into your global business, and do you see any change in that supply arrangement going forward? Finally, when we look at the 4.8% organic growth in the Pest Control, could we get some split on how much of that growth comes from emerging market versus developed market? You've given some stats, but just as a split of that growth number. If you could give us some color, that would be helpful.
Yeah. Morning, Rajesh. I can give some color on your answer, more than numbers. My learned friend may be able to give you some numbers. Synergies on supply side on acquisitions tend typically to be relatively small because most of our acquisitions are relatively small. You are right, of course, that is one of the first things that goes on the synergy list, because there will be a saving. It's very minor in terms of what the contribution that it makes to the overall internal rate of return. If we do a big deal, obviously it's much bigger. Our supply chain is a global supply chain, but that doesn't mean to say we're moving everything from China to America and all around. We have regional hubs. We've got a big hub in North America where we're sourcing most of our products from North America.
We have a big European central hub. We also have a U.K. hub and we have an Asia hub. What we're constantly doing is trying to make sure we've got the right optimum level. These things change. There was a time that the right model was to make everything in China and ship it over. Actually now, for some of our businesses, local manufacture is proving to be the right solution. We've got a very active supply chain model that's constantly looking, "Have we got this right?" It's quite a tactical one. Synergies are not particularly big, but they are real. Dudley still remains. You're probably the only one in the room that knows we've got a Dudley factory, I suspect. We do have two manufacturing facilities in the U.K. One where we make stainless steel things.
We build stainless steel bait boxes, stainless steel equipment for washrooms. One where we make some poisons for pest control and some soaps for washrooms. These are small businesses. They're profitable. They're small niche businesses. In aggregate, our cross-border suppliers, and Jeremy, you might want to cover it in terms of Brexit. Our cross-border suppliers are very small. No one should ever say Brexit will have no impact on our company, but it will be tiny. You won't be reading about an exciting Brexit story with Rentokil in the headline because it's a very small impact on our business. You want to cover that.
What we have done, Rajesh, in terms of the supply chain, just invested a little bit more in inventory to give ourselves a three to six month cover. It's a relatively small amount of the overall business. We've done a lot of planning around Brexit, but that planning says we don't expect much impact at all given that most of the products are consumed in country. Where there might be an issue, we've secured supply of products to mitigate any risk. On the organics, we'll come back to you, Rajesh. I don't have a split between pests and emerging. My intuition tells me emerging is slightly ahead of growth, but there isn't a big difference. Asia overall, which is the bigger part of emerging, grew by 5.9%, and obviously that's driven by pest control.
We've had strong growth in the U.S. in the second half, and pretty good performance around the group in terms of pest control. There won't be a big difference between emerging and growth. We'll come back to you with the figures.
Latin America was double digits, Rajesh. Somewhere between 10 and 15. The Middle East was low single digits. As Jeremy said, it will be in aggregate probably in the six or seven versus the 4.8, I think.
Yeah.
Morning, Andy, Jeremy. Alan from Exane. A couple from me, please. I wanted to follow up on Sylvia's question on the margin profile in the North American business. Obviously, you made a point of the 50 basis point improvement you made in the second half. Could you maybe just give us a little bit of indication of how you see that progressing? Clearly, it's going to be back-end loaded, but is that 50 basis point, could that carry over into 2019 and 2020, then you get a bit of a pickup, or is it going to be much flatter and then a big kicker? Secondly, the weather impact in Europe. Obviously, we were blessed with a reasonably warm summer in 2018.
Is it possible you can quantify the benefit that you got maybe from the weather, so we're not caught out by any tough comps as you go into that middle part of the year? Finally, on the CapEx side, GBP 25 million reduction in CapEx this year obviously helped the cash flow. Any sort of guidance, comments you can make on CapEx for 2019 and 2020, please? Thank you.
It is back-end loaded. We did a little bit of a chart on this at the capital markets stage. There's 3 component parts to the margin improvement: organics, M&A, and Best of Breed. To some extent they go together. If you can get the Best of Breed, that flows into the organics, and it helps the synergy delivery as well. The key parts of the Best of Breed we're looking for, as I was saying to Sylvia, is the service productivity and the field admin, and you really need the systems in place and the process in place to deliver that. If I was looking from here through to 2021, I'd probably go quarter, half in terms of the way that will work its way through, Alan, as a rough guide to what the timing would be. The second question was to do with?
It was quantifying the impact of weather-
Weather
on organic growth in Europe, so as to avoid unhappy comps in the nearest time.
Yeah. Difficult to separate the sugar from the tea. What you can see is organic growth in Europe overall at relatively high level at 3.6, and some numbers. Let us come back to you on trying to work out what that impact might have been.
It's difficult to say. You're right to raise it, of course.
Yeah.
It's difficult to say it couldn't be huge. It only impacts pest, not hygiene, obviously. Our pest business is 80% portfolio, 20% jobbing. It doesn't affect the 80% because that's the contract base. It's the jobbing piece. You've got 20% of pest times Europe. It didn't affect every market in Europe, and it only affected it for three months during the hot season. We did see an impact, there's absolutely no doubt. Really hot summer means more flying insects, means more call-outs. If Jeremy can try and calculate it, we'll make it available.
It's more looking back at previous years and seeing what Europe has been doing year on year, and identifying that. I think it's just a bit more granular analysis. In terms of CapEx, overall we're looking at cash conversion of 90%. That's our medium-term target, so that's what I think you should be looking for in your models. Within that, we'll be looking to increase our investment in IT across the group as we have been doing in the last two or three years. Moving into things like AI, the connected devices, as Andy said, continuing with the re-platforming and the applications deployment in the U.S., and continuing to drive efficiencies and effectiveness through that CapEx. Beyond that, it's relatively linked to revenue growth. It's motor vehicles, it's EFR. There's no particularly big projects out there.
There'll be a slight increase relating to IT, but otherwise, looking at CapEx as a percentage of sales being broadly similar to what it was in 2018, with that growth being around the growth of the business.
Hi. Morning. James Winnek calling from Jefferies. Just had a couple quick ones. One was on Cannon in the U.K. Last communication was revenues of about GBP 40 million and profits of GBP two million. Just wondering if you could give any update on how the profitability of that has developed, given that you've had to hold it separately as a separate operation.
It's coming up.
Second, in terms of France Workwear, since its return to profitability, I'm wondering if you're able to give any comment on the potential divestment of that business as you divest Workwear elsewhere, and if it's fair to assume that now it's returned to profitability, it's kind of increased probability that you would divest of that asset. Thanks.
Thanks, James. I'll take those two. I think the Cannon U.K. situation, just to sort of remind everyone else who may be not familiar with it. We bought the business effective, I think, 1st January 2018, across multiple markets, GBP 80 odd million of revenue. Just over GBP 40 million of revenues in the U.K. Since the 1st of January, we've been required to hold that business separately whilst the CMA has conducted its review, as James' question points out. That's come to the end of its process, the final determination at the end of the phase 2 review from the CMA is that they require us to divest a relatively small part of that business, and we're in the process of doing that.
One of the curiosities of the Hold Separate process is it really is a Hold Separate process, which means even I am not allowed anywhere near it. I'm not allowed to see it. I'm not allowed to talk to the guys who run it. I'm not allowed to see the numbers. Jeremy gets to see the numbers to add it up. It really is this wonderfully interesting process. We laugh internally. Clearly, I do know the numbers. The business has performed very well. Go figure. We're not running it. It's completely separate, hasn't got any synergies, the business has performed well. I don't think we're at liberty to disclose the numbers of the business, but what people worry about in a Hold Separate situation is, has that business deteriorated? It hasn't. The revenue's held up, and the profit has done reasonably well, as well.
We're really excited and looking forward to the day that we can complete any partial divestment, satisfy the Competition and Markets Authority, and get on with the job of integrating the business like we have done elsewhere. We're not actually at liberty to disclose separate numbers under the terms of the Hold Separate, but it's performed fine. France. Look, our position on France hasn't changed. We're professional managers of a portfolio of assets. It is not a core business for Rentokil Initial Workwear. We've got two really good positions now. We've got a very good 18% in a joint venture with CWS-boco, which is one part where we participate in the Workwear industry, and we continue to hold our France Workwear business.
What I said in the past was there's absolutely no way that makes any good sense to me for us to consider selling that business if it was in decline and it had serious issues to be dealt with. I would say we have now completed two years of our three-year plan for that business. We've still got quite a lot to do. I use the phrase, we haven't declared victory on France yet. There's still a lot of challenges in the French economy. There's still a lot of challenges in the French workwear industry. We've still got some things to fix in the business. My position hasn't changed. We will do the right thing by our shareholders at the right time, and if the right thing is to divest the business, that's what we would do.
If the right thing is to hold it, we would hold it. The critical thing, and I continue with that, is we've got to make sure that we've got a really top-quality business. That's why I shared some of the numbers with customer retention in the 90s, with colleague retention in the 90s, and a return to organic growth and return to profit growth. I feel good about what we've been able to achieve, but we're not quite finished with our three-year project yet. If you feel that I haven't answered the question, you've understood my answer correctly.
Morning, James Beard from Numis. A couple of questions, if I may. Just following up on that Cannon question from earlier. Are you able to give an indication of when that divestment process might come to a conclusion? A second question on labor costs within the business. You've obviously alluded to staff retention and recruitment within the slide deck. Are you able to give a sort of indication of what labor inflations look like across the group and specifically within North America? Because we know from what you guys said last year, from what your competitors have said over the last couple of years, that there are some real pockets of tightness within that economy. Has that situation changed much over the course of the year?
On the first part, the Cannon one, it's all dependent on a process which we have to work through with the CMA, and then it's dependent upon finding the right buyer and the right buyer being satisfactory to the CMA. Assuming all of that works as we hope it would within the next three to six months, hopefully we'll have that completely resolved and completed. That would be a reasonable timeframe. I'll let Jeremy answer the labor, cost labor inflation point. You're absolutely right. Why did I lean so heavily at the end on the employee piece? It is without doubt the single most important strategic issue for business services company. We employ 40,000 people around the world. Retention rate roughly is about 85%. Each year, we have to find 15% of 40,000 people, which we have an industrial machine that sits behind that.
If we can get retention rate up one or two or three percentage points, that's huge for us. If it goes the other way, that's a worry as well. We called this out two years ago. We've been working incredibly hard. We're making really good progress. It is not an initiative. It's not a project. It is life. There are pockets of tightness around the world. I happen to think we're managing them extremely well because we focused on it and we've got a whole massive engine behind it. Every single one of our business meetings, anywhere in the world, agenda item number one is safety. Agenda item number two is people. Without exception. Every single meeting starts with that agenda to get that focus. I think we are making really good progress. Do you want to cover the cost side?
To Andy's point, the issue what we're finding in our model is not really around inflation as much as it is around access to-
people. We're not managing the situation by taking salaries up to try and recruit. We're trying to manage our recruitment and our retention better. Cost inflation in the U.S., 2%-2.5%, that type of level, which we cover with annual price increases. The other point I'd make to Andy's employer choice, the other obviously key emphasis of the whole digital re-platforming is to improve productivity and try and increase the efficiency of our back office. It's another way of managing your employment issues, is to increase productivity and look to, particularly for the more mundane jobs in the back office, look to automate those and use AI to manage that element of it as well. That's another part of the model.
Thank you very much. It's Mark Van Sand at Citi. Could you talk a little bit about U.S. competitive environment? I know it's quite early days maybe with ServiceMaster sort of ex-American, ex the disposal. Could you talk a little bit if you've seen a change in competitive behavior, and also could you talk to maybe pricing for deals, if you've seen an uptick, please? Thanks.
Thanks, Mark. I have to be honest, we haven't really seen a major shift in competitive rivalry in the U.S. As I mentioned, there's 20,000 Pest Control companies out there, and there's three or four ones of scale. You saw ServiceMaster results out this week looked pretty good in the fourth quarter. I think ServiceMaster had said that they were going to focus on commercial. We are more commercial than residential. I think you also heard them say in their results that they haven't done so well on commercial, and they've done better on resi and termite. If I'm very honest, I would say no, the competitive scene feels broadly stable, constant. I mentioned our national account progress, up 15% last year. I think we were up 20% the year before. We're continuing to have a sector focus and a big national and commercial focus.
That's where we believe we've got really strong competitive advantage. That's why the technology, the innovation, the global brand, the positioning in the food industry, all of those things play to our strengths. There I would say, I think we're getting stronger in our sweet spot. I don't think you're seeing major plate tectonic shifts. If they are, they're not finding their way back to my hearing. I would assume that it's broadly similar. Somebody will win in a region one period, and they'll do less well in a region the next period. In terms of M&A pricing, I guess two points. One, half the world's Pest Control takes place in North America, and the other half the world's Pest Control takes place elsewhere.
Elsewhere, we would say, I think pricing remains pretty sensible, pretty reasonable, and certainly again on our washroom side, probably more sensible and more reasonable. North America, prices are high, but they have been so now for two to three years. That would be my perspective. I don't believe, based on what we've paid for the assets and what we hear others have paid for the assets, I don't think prices are going up. I think they have gone up. I think they've been up there for quite some time, two, three years. You may recall, we reduced our internal rate of return for acquisitions in America from 15% to 13%. That was about two years ago.
Three years ago.
Two, three years ago. We did that to ensure that we could be competitive in North America. We don't typically have to drop to 13% outside of North America. Expensive in North America, yep, but we still maintain our financial discipline. If we can't make our numbers and can't make the model, we don't go for the asset. There's still a good quantity of assets available. We picked up two in January. Yeah, look, I think it's competitive, but it's not-