Good morning, ladies and gentlemen. Welcome to our conference call for our Rentokil Initial's Trading Update for the T hree Months to the 30th of September. This call is scheduled for 45 minutes, and now let me hand it over to CEO, Andy Ransom. Please go ahead, Andy.
Thank you very much. Good morning, good afternoon, everyone. I'm here with Stuart, and in a few minutes, we'll be pleased to take any questions. But first, let me just say a few words covering the third quarter, and importantly, the actions that we're taking following the September trading update. In the third quarter, the group delivered total revenue growth of 3.6%, of which organic revenue growth was 2.6%. There was good momentum sustained in the group's international regions, which in aggregate, delivered organic growth of 4.4% in the third quarter, with Europe delivering organic growth of 4.7% and the Asia and MENAT region delivering organic growth of 6.5%. Year to date, our international businesses outside of North America have delivered a combined organic growth rate of 5%.
Turning now to North America, where in the third quarter overall, we delivered organic revenue growth of 1.4%, with North America Pest Control also up by 1.4%. Clearly, we were very disappointed to announce in September that the business was underperforming our expectations, and since then, we've put in place focused action plans on a number of fronts. Firstly, in our operations, we've taken decisive actions to mitigate cost overruns. Given our elevated workforce costs this year, we've reduced our sales and service headcount in addition to the normal ongoing off-season headcount reductions. Over the last few weeks, we've removed around 250 roles from service, sales, and back-office functions with an annualized cost saving of around $22 million. We've been tightly managing overtime and labor as we've entered the off-season.
As we said in September, material and consumable costs in the North American business have been higher than expected, partly due to inflation. This was also an impact from our new ordering process for Terminix branches and a weaker termite season that resulted in elevated inventory. To help mitigate some of these effects, we've now implemented strict ordering controls at branch manager and regional director levels. Some additional cost is due to inflation, and that's expected to persist, and that's around $7 million on an annualized basis, with around $10 million of other material and consumable costs expected to unwind during the fourth quarter and next year. Secondly, we've progressed our initiatives to increase organic growth through the Right Way 2 g rowth plan.
While we've 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 the fourth quarter, we're looking to deliver improved leads for a number of our other master brands, while also increasing lead generation from our organic search initiatives. In the fourth quarter, we'll also be piloting the opening of at least 10 new satellite branches. These are smaller branch offices from which colleagues can cater for the needs of customers, and in particular, potential new customers in key target cities. We'll also be assessing the value of a physical presence to the visibility and digital presence of our brands and services.
In sales, we're introducing a back-to-basics approach with increased focus and accountability on executing the selling basics, such as improving the speed from lead to inspection and to proposal, and increasing the average number of sales proposals per sales rep per day. At the half year, we highlighted the need to focus on customer retention initiatives, and this program continues to build up as we aim to drive improvements to all phases of the customer experience. We're adding three senior leaders in this space, in addition to the 40 team members that we've added to the dedicated customer sales team. Customer retention for the overall North American business improved slightly in the quarter to 79.9%. Excuse me.
We're also pleased to see a continued improvement in our North American colleague retention, which moved up from 77.8% to 78.5%, with good improvements in both service and sales. Other actions have included the appointment of a new Chief Marketing Officer and Chief Operating Officer in North America, and the appointment of an interim CFO for North America, while the search is underway for the permanent replacement. You may also have noticed that we are recruiting for at least one new Board Member with specific experience in U.S. network-based services or industries and/or B2C marketing.
Thirdly, on the integration front, the program proceeded very much to plan in the third quarter with systems and data integration in another 28 branches, with combined revenues of $136 million, taking the total number of branches where we've integrated the systems to 36, with revenues of around $172 million. Importantly, at these locations, there was minimal disruption to operations, with customer retention stable and colleague retention very strong. We're now in a very busy and important fourth quarter for the integration, with systems migration continuing in a further 23 branches, with a total revenue of around $130 million.
Importantly, we're also on track to undertake the first rerouting of our technicians in the integrated branches, as well as the piloting of our new service and sales pay plans across eight branches, affecting over 250 technicians and around 40 sales colleagues. Over the past year, our business has experienced significant change activities as we've implemented our integration and Right Way 2 growth strategies. While we remain confident that these strategies will lead to a stronger and faster-growing organization, during Q1 next year, we'll be reviewing our optimum branch network footprint, which will be informed by the early results of the new Satellite branches that will be opened during the fourth quarter. We'll also review the effectiveness of the new technician and sales pay plans being piloted later this year.
The review will result in 2025 synergies being pushed out by approximately 2-3 months, and we'll update the market on this review at the full year results in March. We're taking action on many fronts to address costs, to focus on growth, to drive the integration forward, and to add talent. There's no change to our 2024 guidance. We remain convinced about the long-term attractive growth potential of the North American pest control market, which continues to grow at around 5% per annum, and in the significant opportunities that we have to capture this growth. Our international businesses, which account for around 40% of group revenue and profit, continue to perform well. With that, let me hand back to the operator, and then Stuart and I will be pleased to take any questions. Thank you.
Thank you. We will now begin the question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue, and if you'd like to withdraw your question, again, press star one. Your first question comes from Annelies Vermeulen with Morgan Stanley. Please go ahead.
Hi. Hello again, Andy and Stuart. Just one follow-up from me from this morning. So you mentioned this morning that you've had a significant improvement in five-star Google reviews across your major brands in the last few months. Is that just that the service quality has improved so dramatically, or are you also being more proactive in asking customers to leave those reviews? And equally, is it a KPI that you're measuring your technicians on? As in, do you incentivize them to get those reviews? Thank you.
Thanks, Annelies. I'd like to think it's a bit of both. Certainly, the second is true. It's been the case, I would say, for the rest of the group for quite a long time, that if technicians are complimented by customers and say, "Thank you for a fantastic job," they're trained to respond to that customer. "It'd be wonderful if you'd be happy to leave us a review." And so we're no different to most companies in that regard. You know, we don't go soliciting reviews, but where we have happy, engaged customers who tell us that they're delighted, we do ask them, "Would you mind doing that?" And I think we were not doing that systematically in the U.S.
If we look at year-to-date reviews, Terminix, just I happen to have it here, Annelies, so thank you for the question. Year to date, in 2023, we had about 14,000 five-star reviews in Terminix. This year we've had 38,000 five-star reviews and similar improvements, in fact, bigger improvements on a percentage basis, for the other master brands as well. So it, it's definitely something we've been focused on. I mentioned on this morning's call that, look, if you wanna drive up organic search, you need to do three things consistently well. The first is you've got to get your website and webpage content responsive. Google's made some big changes to its algorithm recently, using generative search. If you've been searching, you've probably spotted it. The first answer you get to many questions is an AI-generated answer.
And now the websites whose content most closely relates to the answer that the AI has generated will be the most responsive for organic search. So the first thing is a lot of work going on to update, upgrade, refresh web page content. The second is five-star reviews. We all know it in our lives. We go towards five-star customers, and we look at those reviews before we make a purchase. That's why it's important. And the third factor of driving organic search is the location of the operation. And that's in part the reason we're piloting the satellite branches. I'd like to think customer service is part of it as well.
You know, clearly, you have to have happy, engaged customers telling you that they love your service for you to have the opportunity to ask them to leave a review. If we look at things like our CSAT scores, NPS scores, they remain consistently high. I'd like to think it's both, but there's no doubt we've been more proactive. Thanks, Annelies.
Thank you very much, and thank you for the stats, a good one.
Yes.
Your next question comes from the line of Ollie Davies with Redburn Atlantic. Please go ahead.
Hi, Andy. Hi, Stuart. A couple from me. Just on the guidance of 1% growth in the second half, I guess, you know, that implies a slowdown to about 0.5% in Q4. So just wondering, you know, how conservative that is, you know, given the sort of positive commentary on leads, or is the slowdown, you know, basically implied from the rerouting drag, you know, from the pilot scheme you're about to complete? And then, I guess secondly, just on the pilot scheme, I understand you've told those employees the new pay plans, which kind of go into effect at the end of the month. So just wondering what the kind of early reception's been there. Thanks.
Yeah, thanks, Ollie. Yeah, you know, I can do math as good as the next person, I suppose, and so you're not wrong to say, "Well, hang on a minute. If it's circa one for the second half, and you've done 1.4 , does that imply something like, you know, 0.6 ?" My honest answer to that is, look, you know, 1.4 is circa one. I wouldn't get carried away with 1.4. We're not putting the champagne on ice for 1.4, and it's circa one. The point about the fourth quarter, it is the off-season. You know, we go from summer into fall into winter, so it's historically the off-season. Yes, we've got, you know, further integration activity in the fourth quarter.
I don't think we're calling off. We're calling out, you know, an expected downturn from performance in the fourth quarter. But for me, 1.4 is circa one. I'm not saying put us down for 1.4 for Q4, but I'm equally not saying put us down for 0.6 . I don't think there's, you know, a join the dots between the two events. It would be daft of us to say, "Hey, you know, we've delivered 1.4, so now we think the new number is 1.4." The track record of us calling organic growth when small values can move that number quite materially has not been very good, let's face it, in the last twelve months.
So I think the best guidance we can give you is it's circa 1% for the second half, notwithstanding 1.4% in the quarter. On the pilot schemes for the pay, we've not launched those. I think we launched them, I think, on the 10th of November, I think it is. I think that's where. Well, I may be wrong. Sometime in November, I think it's the 10th. What we've done is some, what do you call it? You know, so some branch consultation. So we've not gone to an individual and say, "Joe or Sally, this is going to be your new pay." We have socialized the elements of the new pay plan with a number of the branches to whom this will be implemented first.
And overall, I don't have detail, the feedback that was fed back to me was really positive. People understood the scheme, understood what we were trying to do, and we didn't have, you know, a big revolution on our hands. We had positive feedback, but you know, until you get there and people see, you know, the dollars and cents that they get in their pay at the end of the month, that'll be the acid test as to whether these have landed well. We think they'll land well, but at this point, we've just really socialized the high levels of the scheme as opposed to implemented, which happens next month.
Great. Thank you.
Cheers, Ollie.
Your next question comes from the line of Allen Wells with Jefferies. Please go ahead.
Hey, good afternoon, Andy. Good afternoon, Stuart. Just to kind of follow on from some of the questions from this morning. The comments you made about kind of satellite branches, this obviously marks what seems like a bit of a U-turn from the big branch strategy that you kind of were pushing initially with the acquisition. There's obviously an optimum branch footprint review as well going on, which you've also announced. I was just thinking, how do you feel about the overall total synergy target that you put out and then upgraded in light of this? Obviously, there's been lots of moving parts here as well, so I'd be interested just to see where you kind of see that sitting. I think it was originally north of $225 million, but we've had changes now.
So in terms of the branch strategy, was obviously critical in terms of driving synergies. Maybe just a bit of an update on that as well. Second question would just be on some of the Board changes. Maybe you could just say a few words on what some of the early impacts of bringing Trian onto the Board are as well. And then finally, just because it really wasn't talked about much and slightly less important now, but the hygiene growth obviously slowed a little bit in the quarter. It had been relatively strong. Is that just kind of a bumping up against tough comps? Is there anything underlying that's going on in hygiene as we just think about the second half and into next year as well? Thank you.
Thanks, Allen. I'll do the first two, and maybe Stuart, you pick up hygiene.
Sure.
Yeah, look, your phrase, not mine, U-turn. I don't think you can mark us down for a U-turn. What I think you can mark us down for is an intelligent reflection on, have we got the optimum branch structure here? And can we enhance that branch structure through the use of satellite branches? So don't treat this as a volte-face. Don't say, you know, this is a Maggie Thatcher U-turn. This is a reflection and an iteration. And, you know, we've not said anything about branch size per se. And, you know, this review of the satellites and the optimum branch is not two separate reviews. This is one and the same thing. So what we're saying is, "Hey, look."
You know, I can't sit here two years into the integration, and say that we're proud of our organic growth performance, and some of our weakened organic growth performance must in part be down to decisions that we've taken, and therefore, we have to look more closely at the branch locations, and by all means, the branch size, but I think the opportunity to seek to have increased number of branches, but small ones, in the locations which we believe will drive a level of more local traffic, that is a smart thing to do. You could say we should have done it two years ago, by all means, but I think it's a smart thing to do, so we'll review Q4 and into Q1, and we'll see, one, what do we make of all of that?
We could come back and say, "Hey, doesn't really make any difference," or we could come back and say, "You know, this is magnificent, and we need to do a lot of it." Until we've done that work and had some, you know, results from that, it's really difficult to say, well, what are the implications for that? As I sit here, we're not calling any implications for the, the outturn on, synergies. So we're not saying that this has profound implications on the, synergies to be delivered. The cost of the satellite branches is relatively low. It's not a, not a big-ticket item. But clearly, the number of them that we decide to go with, you know, between North and a much bigger number, that's something that we'll come back on.
I wouldn't be drawing any conclusions, Allen, at this point, in terms of implications for the scale of the synergy. We still see this as a very, very synergistic integration play with a lot of value still to come. Could it impact timing? Could it impact phasing? Could it impact the territories where we go to first and next? All of that it could do, but we're not calling any of that at the moment. Give us a few months to review the plan, the satellites, and we'll come back and tell you what we think. But as we sit here today, not calling any change to total synergy target. Question about Trian. Look, at one level, I'm not sure it's a terribly fair question to ask.
You know, I wouldn't talk about any Board Director, and I wouldn't talk about any shareholder. I never have done in the past. But given it is so topical and it is fresh, and everyone's sort of got a bit of an interest, all I will tell you is that the relationship with Brian, the new Board Member, is terrific. The contribution to date has been excellent. And the Board, myself, the chair, other directors, Stu, are enjoying having a stimulating and real quality discussion. Long may that continue. I am not gonna give a running commentary on this shareholder or any other shareholder and this Board Member or any other Board Member.
But seeing as you ask, and I understand why you do ask, I would say it's been really positive, and I've enjoyed it, to date. Stuart, hygiene, do you just wanna pick up Allen's comment on that?
Yeah, sure. I don't think there's any particular big news there, Allen. Actually, U.K., and Europe had a pretty strong quarter on an underlying basis. I think in the Pacific, we've got a couple of things. We've definitely got some weakening economy. Australia tends to come late to the party, and I think we're seeing a little bit of that. I think we'll see it into Q4 as well. And actually, pardon me, they did very well through the pandemic, selling lots of air units into corporates and local authorities, and unsurprisingly, that's beginning to unwind a little bit, but they're sort of living a little bit a victim of their success over the previous three years. But I mean, hygiene in most of the world continues to go pretty well and certainly comparable to best.
Cheers. Thanks.
And if you'd like to ask a question, please press star one on your telephone keypad. And we currently have no questions in our... Oh, yes, we do. Your next question comes from Andy Grobler with BNP Paribas. Please go ahead.
Hi. Good afternoon, Andy and Stuart. Just two from me, if I may. Firstly, just going back to kind of satellite offices and kind of broader marketing. When you think about the impact of that, are those satellite offices focused on Terminix or the residential business? Is that the area where you're seeing the potential to improve? And on that theme, some of your competitors have looked to door-to-door marketing to try and enhance their presence. Is that something that you would consider or thought about within that review? And then secondly, just in terms of the full branch integration, route optimization and so forth, what are your expectations at this stage?
I understand it might change, given that review, of how many branches you'll get through in the first half of next year and maybe for the year as a whole. Thank you.
Thanks, Andy. Look, on the first one, so the first one was for the satellite branches, are these Terminix or other branded branches? In terms of the pilots, and we're 10+ , I need to check on the detail, but I think they're all Terminix. They're gonna be branded Terminix or the vast majority are. One of the sort of interesting things that as you dig into the detail is if you have more than one brand at the same physical location, you're not gonna get an optimum online performance. One brand will always outweigh the other brand.
So, it's possible, Andy, that if we've got a strong Terminix branch, we might put a Western Exterminator satellite branch in the locality. So, I can't say it's going to be exclusively Terminix. We're gonna, part of what we're gonna experiment with, see what is the optimum blend. So we'll look at the brand piece of that as well as we look at the branch piece. But for the ones that we're piloting in the fourth quarter, I think they're all gonna be Terminix or the vast majority. Door-to-door, I mean, I am interested in this, and I'd love to see someone else's economics.
The issue with door-to-door, and by all means, feel free to ask other companies on the subject, but the commissions, the sales commissions that are paid to the door-to-door salespersons is very, very high. And I mean, 80%, 90%, I mean, those sorts of commissions. So you knock on someone's door, they didn't know that they were interested in pest control. They weren't planning to buy pest control that day. They get a knock on the door, they get a cheery face at the door. It's hot, it's sweaty, the bugs are out, and they ask the customer if they're interested in purchasing pest control, and they sell pest control contract to that customer for $1,000.
That salesperson's going to get a very substantial incentive. Well, the company that is running that sales force. So that's the first issue I have with it, is the cost of sale is very, very high. If your bet is that you can sell that customer and keep that customer for six, seven, or eight years, the economics on that look all right. If, on the other hand, you sell those customers and they terminate within 12, 24, 36 months, that's a loss-making account. And you know, in 12 months, it's horribly loss-making because you've got to pay for the cost of servicing and the cost of product. So I'm unashamedly, incredibly cynical and conservative when it comes to that. But equally, we did pilot door-to-door in the summer of this year.
It is an effective way of selling more pest control, but from the economics of it, I'm far from convinced, Andy. So, we're gonna dig in and do more work on that. I mean, there's been some pretty spectacular failures of door-to-door pest control companies in the past, and there's been a few successes of pest control companies in the past using door-to-door. So it's not for me to say it's, you know, it's not an effective sales strategy, but I do struggle with the economics. But we'll continue to work, we'll continue to look and see what are we missing, why is it working. I do think other, you know, competitors have different approaches, and so worth asking others as well, how they see the economics. Sorry, your third question? Oh, yeah.
The third question I didn't write down because I don't know the answer for you. In terms of, you know, what percentage of the network will be integrated through the first half of next year, et cetera. I mean, clearly, by the end of this year, on a revenue basis, we will have taken just around 10% or just over 10% of the full combined estate of Terminix and Rentokil companies, and they will have been, you know, fully put through their paces on the systems integration.
By the back end of this year, we will have piloted a smaller subset of that in terms of the pay plans, but and we will also have fully rerouted or rerouted for our American colleagues a reasonable chunk of that that cohort of around 10% of the business. Won't be doing much of that in the first quarter at all, because that's the review period where we're gonna go through and say, "Okay, the pay plan's working, the satellite thing working," et cetera. Then we'll pick it up again back into Q1, early Q2. And assuming we go to current plan, then it will be, you know, eighteen months plus twenty-four, twenty-three, twenty-two, twenty-one months, whatever it is, of pretty much uninterrupted rollout and deployment.
But in terms of where we are by June, it would be rash of me to say, because that's prejudging where we come out on the review that we've just talked about.
Okay, but the plan is still to be done by the end of 2026, pretty much?
Yeah, and that's, that's the plan, and then could it drift into Q1? Given we're pushing it by a quarter, it could. But again, I have. I've not got a Gantt chart in front of me that goes out beyond 2026. But, as I sit here today, we're not changing the timetable, Andy. But, you know, it's possible. You know, let's see where we come out with the review. If we decide that we need to open, choose to open a lot of satellite branches, then we've got to figure out, okay, let's think about the phasing. Do we wanna do that before we want to do, route integration and further branch integration?
You know, give us the time to work through that, and if there are implications, either on amount, to the earlier question, or phasing or timing, we'll share that. But as we sit here today, we're not calling out changes to either quantum or overall timing, as we sit today.
Okay. Thank you very much.
Cheers, Andy.
We have no further questions in our queue at this time. I will now turn the call back over to Andy for closing comments.
All right, my closing comments are, thank you very much indeed. Appreciate you joining us. Many of you joined us this morning, thank you for that. We'll be speaking to a lot of you over the coming weeks and months, and thanks for the continued interest in the company. We'll look forward to updating you in a few weeks' time and tell you what we're finding out about the work that we're doing through Q4 and into Q1. But for today, thank you very much indeed.
This concludes today's conference call. Thank you for your participation, and you may now disconnect.