Earnings Call: H2 2015

Feb 25, 2016

Summary

Ongoing revenue grew 6.5% and adjusted operating profit 8.5% in 2015, with free cash flow of £148m. Pest control led growth and hygiene returned to growth, while French and Benelux pricing pressure continued; 2016 free cash flow guidance exceeds £110m.

Good morning, ladies and gentlemen. Welcome to the Rentokil Initial preliminary results for 2015. Two years ago this month, we presented the group's new strategy entitled The Right Way, and outlined clear medium-term targets for revenue and profit growth, as well as a significant improvement in free cash flow. Today, trading conditions in the majority of our markets are good, and the company has made further encouraging progress in 2015. Cash flow delivery has been particularly strong, and Andy and Jeremy will give you further details on this in a few moments. Conditions in Europe, though, notably our workwear operations in France and Benelux, remain challenging. However, since implementation in the second half of 2015 of our new workwear quality program, we are seeing a number of operational benefits coming through, particularly in rising levels of customer service and retention. Andy will give you an update on progress we're making in the next phase of The Right Way plan, in particular, how the company is migrating its portfolio into faster growth markets, and also the strategies we set out for our three core businesses of pest control, hygiene, and workwear. Based on our overall encouraging performance in 2015, therefore, and our expectation of further progress in 2016, the board is pleased to recommend an increase in the final dividend for 2015 to 2.06 pence, resulting in total dividend growth for the year of 13.1%. Let me now hand over to Andy and Jeremy, who will talk you through the highlights of the year and describe our plans in more detail. Thank you very much. Thank you, John. Morning, ladies and gentlemen. Thank you all for joining us today. In a moment, Jeremy is going to present details of our results for 2015, looking at the performance of the group and our five regions. I'll then come back and provide an update, firstly on how we executed our Right Way strategy in 2015, and secondly on the progress that we're making in the next phase of our plan as we accelerate growth in pest control, we focus on execution in hygiene, and we drive for quality in workwear. But first, let me just say a few words to set the scene for this morning, covering the key highlights of our performance and how we executed our strategy in 2015. We delivered an encouraging overall performance during the year, with ongoing revenues up 6.5% at constant exchange rates. Organic revenue growth was 1.8%, which was up from 1.2% in 2014. There were good performances in North America, reflecting a series of high-quality acquisitions, but also in Germany, in the Pacific, in Asia, and also in the U.K., which achieved organic revenue growth of almost 5%. Our customer service performance also improved in 2015, resulting in an increase in customer retention of almost 1%. Adjusted operating profit grew by 8.5% in the year, a good overall performance, and reflecting our focus on growth and emerging markets and our density-building activities. Clearly, though, France remains challenging, and I'll come back to that in a few minutes. In Rentokil, we simply have the best pest control business in the world, and it's continuing to deliver accelerated growth. In 2015, revenues were up 13.1%, with 4.6% organic growth, and profits were up 14.2%. Our leadership in digital marketing and our strong pipeline of innovations are clearly making a significant difference to our business. Perhaps one of the highlights of 2015 for me was the return of our hygiene business to both revenue and profit growth. Clearly, there is a lot more to go for here, but the benefits of our product and service investments are beginning to come through. We now have a range of products that are second to none, and they are providing genuine differentiation in the market. 2015 was a standout year for our M&A activities, with 23 acquisitions delivering GBP 158 million of annualized revenues. 21 of the deals were in pest control, the largest, of course, being Steritech in North America. I am pleased to report that the integration is going extremely well, and we are making excellent progress towards our 2016 synergy targets. Finally, in 2015, we maintained our focus on building the portfolio in the emerging and growth quadrants, up 14% and 12%, respectively. All of our acquisitions were in these two high-growth quadrants, which now account for about 60% of our overall portfolio. In summary, 2015, we delivered an encouraging overall performance, and we are confident that as we continue to execute our strategy into the next phase, we will make further progress in the coming year. In a few minutes, I will come back and update you on our progress by quadrant and by business line after Jeremy has taken you through the group financials and the regional financial performances. Thank you, Andy, and good morning, everyone. I will now run through the key financial highlights for 2015 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 6.5%, with organic growth of 1.8% and growth from acquired businesses of 4.7%. Growth in the second half increased to 7.7%, in part due to the Steritech acquisition early in the fourth quarter. Adjusted operating profit before interest for the year on an ongoing basis was up GBP 19.8 million, or 8.5%, driven by strong profit growth in North America, Asia, U.K. and the rest of world, and Pacific, and reduced central and regional overheads, but offset by lower profits in the Europe region. Profit after interest at actual exchange rates grew by GBP 7.2 million, or 3.8% in the year, with a GBP 4.3 million reduction in interest costs offset by adverse exchange rate movements of GBP 17 million. Free cash flow was strong in 2014 and stronger in 2015. Operating cash flow at GBP 221 million was GBP 11 million higher than the prior year, and free cash flow at GBP 148 million was GBP 19 million higher, despite adverse exchange rate movements. Adjusted EPS at constant exchange rates increased by 11.7%, reflecting the impact of a slightly higher tax rate. Looking now at performance by region, North America delivered a strong performance in 2015, supported by acquisitions and improved organic growth. Revenue grew by 16.8% in the year, of which 2.7% was organic. 13 acquisitions were completed in 2015, adding GBP 149 million of annualized revenues. Operating profit was up 28.6%, leveraging the revenue growth, as well as back office and property rationalization and fuel cost savings. This drove a 1.2 percentage points improvement in net operating margins. We are pleased with the progress made to date on the Steritech integration, and with an exit run rate of profit achieved of $20 million on an annualized basis. in 2016, we will be focused on the integration of Steritech, and based on the progress made to date, we are confident that we will achieve our $25 million-$30 million profit target for the year. This, combined with a continued focus on organic revenue growth and bolt-on acquisitions, will deliver further improvements in operating margins in 2016 through increased density, branch cost reduction, and leverage on back office costs. Performance in Europe in 2015 was held back by the continued challenging economic environment across the region, and France in particular. Revenues were up 0.1% in the year, with growth in Germany, Southern Europe, and Latin America, which is managed through the Europe region, offset by declines in the Benelux and France. Profit in the year was down 4.6%, largely due to a GBP 12.7 million reduction in France, where both revenue and profits were impacted by significant pricing pressure. The outlook for our European businesses in 2016 is mixed. Our German and Southern European businesses are experiencing positive trading environments and expect to make good progress in the year. However, the outlook for our French and Benelux operations remains challenging, especially in France, where the impact of pricing pressure is anticipated to continue to impact performance. While we expect trading conditions in Europe to remain difficult, based on the actions we are taking to improve performance, we expect the level of profit decline to be considerably lower in 2016. Revenue in the U.K. and the rest of the world region was up 11.5%, of which 4.2% was organic. The U.K. delivered strong growth in both pest and hygiene, and pest jobbing sales in particular. Revenue growth has been generally strong in the rest of the world region, driven by the Caribbean and South Africa. Profits increased by 12.5% in the year, reflecting the strong revenue growth, as well as the full-year impact of the Peter Cox Property Care business, which was acquired in late 2014. Although Peter Cox has slightly lower margins than the rest of the region, overall, operating margins increased during the year, reflecting leverage from the revenue growth and continued strong cost control. In 2016, we will be looking to deliver improvements in performance through further deployment of the successful U.K. operating model across the rest of the region. The Asia region has made excellent progress in 2015. Revenues were up 11.3% in the year, of which 8.6% was organic, with good performance from both the pest and the hygiene categories. Average growth in the less developed markets of India, China, and Vietnam was up 26%. In our more established Asian markets of Malaysia and Indonesia, growth was in the high single digits. Operating profit in the region was up 27.5%, reflecting leverage from the revenue growth, with a 1.2 percentage points improvement in operating margin, the same improvement that was achieved in 2014. We believe there are further opportunities for margin improvement through revenue growth, service productivity, and back-office rationalization. We acquired a small business in Korea in 2015, and we expect to make further acquisitions in Asia in 2016 to build scale in this key strategic region. The Pacific business continued to perform well in the year, with revenue up 4.3% and profits up 7.3%. Organic revenue growth of 3.5% was driven by increased contract sales in pest and hygiene and improved pest jobbing sales. Operating margins improved by 0.6 percentage points, driven by leverage on the sales growth and continued tight cost control. The region will look for further improvements in performance in 2016 through acquisitions in pest and hygiene and improved service productivity. As I've already said, for the second consecutive year, the group delivered strong operating cash flow, with GBP 220.7 million, representing a GBP 11.5 million increase on the prior year. Adverse exchange rate impacts on EBITDA were partially offset by favorable impacts on CapEx outflows. CapEx was also lower than expected due to the phasing of certain projects from 2015 into 2016. Spend on provisions was lower in 2015 due mainly to the settlement of a legacy legal dispute. Working capital outflows were again relatively low at GBP 0.7 million, reflecting our continued focus on receivables collection and inventory management. Continuing free cash flow of GBP 148 million was GBP 19 million higher than last year and well in excess of our GBP 100 million target, driven by the improvement in operating cash flow, but also by lower cash interest and cash tax outflows. Free cash flow was used to fund GBP 49 million in cash dividend payments, a 13.2% increase on 2014, and our continued investment in bolt-on acquisitions. Including our GBP 272 million investment in Steritech, we spent GBP 369 million on acquisitions in the year, which resulted in an increase in net debt of GBP 252 million to GBP 1.027 billion at the year end. We are pleased with the improved free cash flow delivery of the business over the last two years and the way we have been able to invest this in acquisitions focused on our core pest category and businesses in our growth and emerging quadrants. We will continue to apply our capital allocation model, looking for opportunities to invest in acquisitions that meet our target return levels. Our dividend cover is around three times, and we will continue to maintain our progressive dividend policy. We will execute our capital allocation policy within our overall commitment to maintain a BBB investment-grade credit rating using any available free cash flow to pay down net debt. Looking at our balance sheet position at the end of the year, our net debt to EBITDA ratio has obviously increased compared to the previous year end following the acquisition of Steritech in October. However, with our continuing strong levels of free cash flow, Standard & Poor's has maintained our BBB credit rating. Looking forward, we have increased our free cash flow target to in excess of GBP 110 million in 2016 and in excess of GBP 120 million in 2017, reflecting the impact of the Steritech integration as well as reduced interest cash costs in 2017. In terms of funding capacity, we have plenty of headroom. We have recently extended our revolving credit facility to January 2020, and we will be using our available capacity to refinance a GBP 300 million sterling bond which matures in March 2016. Following this refinancing, the average cost of our net debt will be around 3.5%. Although the equity markets had a difficult end to 2015, our pension scheme remains effectively fully funded, with one of the strongest positions in the FTSE 350. Before I update you on guidance for 2016, just a couple of comments on our reporting framework. Restructuring costs, which used to be a major feature in our accounts, have reduced materially over the last two years. With the restructuring program now at a smaller and more predictable level, with the exception of integration costs of significant acquisitions, we will report restructuring costs above the line in 2016, and I will provide you guidance on the impact of this in a moment. We will be keeping the regional and category reporting structure intact as promised, and there will be no changes made in 2016. Execution of our differentiated strategy is based on a quadrant approach, which factors in the strength of our businesses and the economic environment in which they operate. Given the dynamic nature of these factors, we will continue to carry out some fine-tuning on an annual basis to reflect changes in our businesses and their markets where appropriate. Finally, before I hand back over to Andy, some numbers for your models in relation to 2016. Following a GBP 3 million reduction in central and divisional overheads in 2015, we would expect 2016 costs to be in line with the previous year. As noted earlier, we will report restructuring costs above the line in 2016, and these are expected to be around GBP 7 million. This guidance is for restructuring costs only and does not include one-off items, which are, by their nature, more unpredictable. Integration costs for significant acquisitions will be reported in one-offs, and in 2016, this will include the Steritech integration costs, which are estimated at GBP 5 million in the year. Although net debt has increased following the Steritech acquisition, interest costs are expected to fall further in 2016 to around GBP 37 million at constant exchange rates, reflecting the impact of our recent bond refinancings. Cash interest costs, however, will be some GBP 12 million higher than the P&L charge in 2016 due to the phasing of interest payments. Cash interest costs are then expected to reduce significantly in 2017 to around 3.5% of net debt. For tax, I expect the underlying rate to be in line with 2015 at around 24%, and for cash tax payable to be around GBP 35 million. As you will all be aware, foreign exchange rate markets continue to be extremely volatile. Following two years of strength against most of our trading currencies, sterling has weakened significantly recently with both of our main overseas trading currencies, the euro and the US dollar. This situation could reverse very quickly, of course, but if the current exchange rates were to remain for the rest of the year, we estimate that the overall favorable impact on our reported profits would be in the region of GBP 15 million. For 2016, I expect free cash flow to exceed GBP 110 million in the year, and this is based on my assumptions that working capital outflows will be around GBP 10 million, slightly higher than last year, reflecting some new workwear contracts. Net CapEx in the region of GBP 200 million, reflecting the phasing of 2015 projects into 2016, the increased size of the business, and potential exchange rate differences. In terms of uses of free cash flow, we would estimate M&A spend in the region of GBP 50 million and spend on cash dividends in the region of GBP 55 million. Thank you very much. I'd now like to hand back over to Andy, who will cover the rest of the presentation. Thanks, Jeremy. Let me very briefly give you a recap of our strategy, the performance of our quadrants, and our main business lines, and then I'm going to give you an update on the next phase of our plan. Starting with the strategy, here's a slide you've seen from me quite a few times before. It summarizes how we're now managing the business. We've got the five geographic regions. You've just heard their financial performance from Jeremy. We've got the three core business lines. In a moment, I'll update you on their respective performances. And we've got clear quadrant-based strategies to drive profitable growth. As we now enter the third year of our Right Way plan, there's again no change to our operating model and no fundamental change to our strategy. We've got a consistent approach, and that approach is now driving a quarter-on-quarter, half-year-on-half-year delivery against the medium-term targets that we set out two years ago. Let me summarize our performance first by each of our quadrants and then by the business lines. On an ongoing basis, the emerging quadrant delivered very good revenue growth in 2015. It was up 14% to GBP 142 million. That was fueled by organic growth in Asia, which was up almost 9%, and in Latin America, where it was up 14%. Profit was up 24%, and that reflects the density-building focus and the leverage from increased revenues. It was a step change year for our growth quadrant with a series of high-quality acquisitions in North America, combined also with good progress in the U.K. We delivered revenues up 12% to GBP 943 million in the year and profits up almost 16%. Organic revenue growth of 4.8% in the U.K. was particularly notable, and that was driven by good use of innovation and exploiting our digital expertise. In the bottom left of the matrix there, you can see that the Manage for Value quadrant is now relatively small for us. We have only got GBP 63 million of revenue and GBP 10.5 million of profit. in 2015, we continued to reduce the number of businesses in this quadrant, where we exited our flat linen businesses in both Austria and in Northern Ireland. In Protect and Enhance, we did a pretty respectable job at protecting our revenues, and it was particularly good to see customer retention improve by 1.7%, and that included a 1.4% retention improvement in France. Profits, however, remained under pressure, particularly in France, where challenging economic and competitive conditions persist. Finally, we have undertaken our annual review of the businesses in each of the quadrants, and you can see on the slide there, we have made some adjustments to reflect the growth potential of each business, and we are moving about GBP 90 million of revenues from Protect and Enhance into the growth quadrant for 2016. It is perhaps worth highlighting, two years ago, our Irish and our Italian businesses were both down in the bottom left quadrant there in Manage for Value. They took up the challenge, they moved quickly after 12 months into Protect and Enhance. They have moved again this year into growth, given their excellent respective progress. So I think that is a good example of how we use the quadrant, the matrix strategy in action. Let me give you a quick summary then of the three core business lines of pest control, hygiene, and workwear in 2015. As you can see there, pest control now accounts for 44% of group revenues and almost 50% of group profits. Pest control had an excellent year. Revenues and profits were up 13.1% and 14.2% respectively. Increased organic growth of 4.6% was driven by further exposure to growth markets, and again, good use of our innovations and our digital expertise. Our hygiene business accounts for 25% of group revenues and 28% of group profits. It returned to revenue and profit growth in 2015, and that was on the back of good performances in the Pacific, they were up 3.7%, and in particular, in the U.K. and in Ireland. So clearly, there is still a lot to go for in hygiene, and while conditions in France and Benelux remain difficult, this was an encouraging performance from our hygiene business. Finally, European workwear. This now accounts for 21% of group revenues and about 16% of group profits. Clearly, it was a challenging year for workwear with both revenues and profits down, particularly in France and the Netherlands. The business operates in tough economic conditions and highly competitive markets, but operationally, the business is now performing well, with improvements in safety, in service, and in processing, all in line with the new quality plan. I will update you on our progress against that plan in a few minutes. Overall, a very encouraging year with good progress against our strategy, particularly so in pest control and hygiene. Now let me move on to the next phase priorities that I outlined at the interims. These are focused firstly on the acceleration of pest control, secondly, sales and operational execution in hygiene, and thirdly, the creation of a product and service quality champion in workwear. Underpinning all of this, I said we'd exploit our digital expertise and bring to market our pipeline of innovations. We'd remain very focused on a clear model of density building, and we'd drive productivity through our sales and service teams, and in particular, we would step up the sharing of best practice across the group. Of course, we'd continue to use our excellent M&A capability to create further value, building those positions in the growth in the emerging quadrants. Let me start then with the acceleration of pest control. Rentokil, as I've said many times, is quite simply the best pest control business in the world. We've got an unrivaled global leadership position. Our market share in key growth countries such as North America continues to strengthen. We've got a good M&A pipeline to build density on existing positions. We've got unrivaled brand strength, and we've got technical expertise to match. We're continuing to develop innovations that set us apart from the rest of the industry. All in all, we are extremely well positioned to take advantage of the big drivers of future growth in pest control, drivers like increasingly demanding regulatory and environmental requirements, the rising expectations of consumers for improved standards of hygiene, and growth in emerging markets, where today we've got many market-leading positions, but where the potential for future growth in countries like India, China, Indonesia, Brazil remains very, very significant. Clearly, the acquisition of Steritech in the fourth quarter was a really important milestone for our pest control business. I'm pleased to report the integration is going extremely well. The integration workstreams got off to a fast start, and we exited 2015, as you've heard from Jeremy, with a profit run rate of $20 million. So in other words, we've already made very good progress towards our stated objective of delivering profits of between $25 million and $30 million this year. In particular, we've identified good opportunities to build that route density. We've done a detailed overlay of every single route across the country. The combined national and regional account teams have notched up their first large joint contract win with a nationwide hotel group. The back office program is well underway, removing duplicate roles, delivering on our planned procurement and property consolidation opportunities. This is a transformational deal for the company in North America, and it's a big part of our plan to accelerate growth in pest control. Although we're only three or four months in, the business has made an excellent start. Now, given the recent spotlight on mosquito control, this chart provides, I think, a good example of our pest control expertise in action. Having undertaken mosquito control for many, many years across the globe, Rentokil has got a depth of expertise and experience that is simply unmatched. We provide services to protect people from mosquitoes, which obviously carry the Zika virus, but also dengue, West Nile fever, chikungunya, malaria, many other very, very serious threats to public health. Our experts within the group are all linked together in a global technical community, and they use an in-house social media platform, and they're able to learn from each other and transfer up-to-date knowledge and information across the group. When an issue like Zika does occur, we can respond very, very quickly, and that's exactly what we've done in Brazil with the recent launch of a new service called MIRA 360°, and that's providing an integrated control and monitoring service against the Aedes aegypti mosquito. I see that as a really good example of our global expertise in action. Moving now to hygiene, and delivering a return to revenue and profit growth in hygiene was probably, for me, one of the most pleasing performances in 2015. I said at the interims that hygiene had to execute now with a really clear focus on sales and operational execution, and it's made, I think, a very good start. During the year, we continued to strengthen the product range with the rollout of new no-touch and color products, as well as additions to our existing Signature and Reflection ranges. Now we've got hygiene products that are second to none. We've got the sales teams are selling with renewed confidence, and it's particularly pleasing to see that France is, in fact, leading the group in sales of our new color Signature range. Our hygiene products and services are now available in over 45 markets around the world, and in line with our focus on execute now, the country teams have implemented a large number of local initiatives to drive sales and operational effectiveness. On the screen, there are just a few examples of best practice from our country operations, but what's particularly pleasing is that we've now delivered more than 35 best practice guides across our hygiene and pest businesses, where we take sales and operational best practice from around the world, and we ensure that everyone gets the benefit across the entire group. If I turn now to Europe and to workwear, and Jeremy's covered the performance of the Europe region earlier, but just to build on one or two points. Benelux has been on the front page for us for some time, but I now feel that the business is much improved. We've resolved the service issues that affected the operations back in 2013. Revenue was only slightly behind 2015. Profit was, in fact, slightly up year-on-year on the back of lower service and processing costs. Belgium, certainly more stable, and actually delivered modest revenue growth on prior year. However, Netherlands workwear does remain under pressure from both market and economic forces. Germany continues to provide solid growth. Revenues and profits were up 4.1% and 6.7% respectively, and also good to see high levels of improved customer satisfaction leading through to retention rates up 3.8%. France, as you know, remains our most challenged market, where the economic environment and the market conditions remain difficult. However, operationally, the business is performing pretty well, and we're focused on those things that we can control, like customer satisfaction, customer retention, both of which improved during 2015. Let me update you then on our quality plan for workwear. At the interims, we said that the next phase for our workwear business was to deliver genuine differentiation through product and service quality, and I outlined seven areas of focus. On this and the next slide, you can see that progress is underway across all seven areas. Firstly, we have established 12 new quality-focused KPIs across the business, and we have made immediate progress in customer satisfaction and also customer retention, which was up 2.4% in workwear. Clearly, best-in-class processing is an important target for us, and we have made a good start there as well with the introduction of new detergents across our 37 laundries. Those new detergents have resulted in 50% reduction in bleach used, 30% reduction in textile wear, 10% reduction in water usage, and an 8.5% reduction in energy usage, all, of course, having positive cost benefits as well. While we are upping our game in terms of the quality of the workwear we provide, the number of items that we have had to rewash to meet our own high standards has also reduced by some 14%. We are seeing some good operational improvements coming through. We are also beginning to make progress in the final three areas of the program, smarter selling, products and service innovation, and leveraging best practice. I will just pick out one or two examples: we created a new product and service innovation action group, and that has begun work on European range harmonization. That is going to reduce the number of different items of workwear that each of the country operations have to manage across their respective markets. We are the first company in Europe to introduce an innovative CO2 washing system. That is a waterless system similar to dry cleaning, and it significantly reduces energy usage. You have heard me say before that in my experience, a company or a business that has got a strong safety culture is typically a well-run operational business. It is really pleasing to say we have had significant improvements in the workwear business with far fewer accidents and working days lost. Finally, just as in pest and in hygiene, we are continuing to exploit our scale by the sharing and use of additional best practice, but also from the development of a new customer care training program that is being rolled out across workwear. We have got a clear plan, we are executing the plan, and as always, we will keep you informed about how we are progressing against that. But I am encouraged by the start that we have made in the quality plan. Finally then, let me provide a very quick update on the underpinning activities of the next phase, particularly our digital expertise, innovation, and of course, M&A. I am delighted with the progress that we are continuing to make in delivering high-quality digital experiences for our customers, driving sales through our websites, improving retention through our high-quality customer extranets. Our pest control web platform is now live in all major markets, and in 2015, delivered an increase in visitors of 19% and an increase in inquiries of 13%. Just to put that into perspective, in the U.K., we get two-thirds of all new pest control business finds us through the web. We do not find that business, it finds us. This is a critical area for Rentokil. Having focused on pest control first, we have now developed our new hygiene web platform. We just launched that in the fourth quarter in Australia. We will be rolling that out across other markets in the next phase. At the same time, we are also extending access to our new extranet platforms, both for pest and for hygiene customers. These are really industry-leading online portals which provide our customers with management information 24/7, and that is available on any device. Turning briefly to innovation, with our new PestConnect service, which we successfully launched in the Netherlands, we have introduced 24/7 pest control monitoring. The service combines our most advanced RADAR mouse control units with mobile connectivity to message the technician when a trap has been activated. This is a service that lends itself particularly well to high-dependency customers like food and pharmaceutical industries. We can provide a very, very high level of service, but it also gives us improved productivity as well. Our newest bait station, AutoGate, was launched in Germany very successfully in 2015. It was one of the reasons why Germany had a record year for pest control last year. This new product has been developed to allow Rentokil to use chemical rodenticide baits in outdoor permanent baiting, which would otherwise be restricted under new European regulations. When a rat enters the unit, it breaks an infrared beam, the beam opens a little door, behind the door sits the poison, and that satisfies the regulator that that is not permanent baiting, and we are the only company in the world that has that solution. We demonstrated to you HygieneConnect last year. This has now been proven out in the Netherlands and in Korea, where it is helping to raise handwashing compliance amongst our customers' employees, and compliance is typically up by over 50%. HygieneConnect is now going to be fully launched in the U.K. in 2016, and other markets to follow. Overall, I am delighted with the commercialization that we are beginning to see of our innovations, as well as the development of a strong pipeline of new innovations yet to be launched. Finally then to M&A. I mentioned earlier that our M&A machine delivered 23 acquisitions in 2015, annualized revenues of GBP 158 million. It was a step change year for us, particularly in that growth quadrant with 20 deals, 13 of which were in North America. We monitor the integration and performance of our acquired businesses every single month to ensure that they are continuing to meet our financial hurdles. Of the 37 acquisitions that were completed between July of 2013 and the end of 2014, we only had two very small acquisitions, both in the Protect and Enhance quadrant, that are delivering returns which are slightly lower than required for the hurdle rate of that quadrant. Of course, in that quadrant, the hurdle rate is higher. Every other deal, the other 35, are all delivering returns at or above their required hurdle rate. The performance of the program is going extremely well. As you know, we have got a clear capital allocation model. This chart summarizes really the change in the shape of the group over the last two or three years. Since 2013, we have reduced our exposure to Manage for Value businesses from 35% of group revenues to just 4%, whilst at the same time increasing our exposure in the growth and emerging quadrants from about one-third to two-thirds of group revenues in 2016. Through the next phase of our strategy, we are going to continue to drive that improving shape of the group. As Jeremy has mentioned, we expect to spend around GBP 50 million this year on very targeted acquisition cases. Indeed, we have completed six bolt-on acquisitions so far this year, and the pipeline remains very strong. Finally then, a quick summary before we open up for questions. We continue to make encouraging progress. We are executing the next phase of the strategy at pace. We are accelerating in pest control. It is a world-class business. It is performing well. Hygiene has returned to revenue and profit growth, and it is focused on sales and operational execution. The quality agenda in workwear is now underway, and although we have clearly got difficult conditions in France and the Netherlands in particular, we are seeing progress in the areas that we can control, such as customer satisfaction and retention. We are underpinning our next phase priorities with strong digital expertise, with industry-leading innovations. We have got a clear focus on building margins through density and through that greater sharing of best practice. Our capital allocation model continued to work well for us in 2015, facilitating our targeted M&A program and, of course, the recommended 13.1% dividend. All in all, I am very confident of further progress for the group in 2016. Thank you very much. We will be happy to take any questions. Hey, good morning, guys. It is Alan Mills from Morgan Stanley. A couple from me on France, a couple on the U.S., if that is okay. Maybe just starting with the U.S. Could you talk a little bit about the competitive landscape and what maybe your competitors are doing following the Steritech acquisition? Are you seeing anyone increasing their focus on the commercial side, looking at that acquisition as a threat? Any update you can sort of provide on that would be great. Secondly, just on potential tailwinds for growth in 2016 as well. You touched on things like the Zika virus. Weather conditions seem to be quite supportive as well globally, but also in the U.S. Maybe you can talk a little bit about how you see just general market growth in pest in 2016 versus 2015. In France, three point. Obviously, the decline in growth year-on-year. Could you split that out by price versus volume, if possible? Finally, just sort of general conditions in France. I mean, obviously, you talk about challenging environment, but are things actually getting any worse there? Are you seeing some stabilization, and i.e., the sort of the declines that you are thinking about in 2016, is that really sort of contracts that have already been signed, or is that further declines in deals that are being done now and moving forward? Thank you. Thanks, Alan. We will start with North America. To be absolutely honest, I do not think we have seen any competitive response. It is a very, very big marketplace, North America. Steritech, about $100 million of revenues, all in commercial pest control. Very, very high reputation and a customer retention rate into the 90s, a customer satisfaction rate which is the highest in the Rentokil Initial group. We have acquired a very, very high-quality business that has got very strong customer relationships. I cannot say that competitors are not working hard to attack that position. What I can say is I have not seen any evidence of success up to this point, and it is a very, very big market. Steritech is particularly strong in its homeland geographies, the Charlotte area, and I would say, I think they have got a very good position, quite difficult for competitors to dislodge. I am just delighted that the integration has gone so well, Alan, to be honest, because I have done a lot of deals over my career, and you plan for the best, and sometimes you are disappointed. On this one, so far, it has been absolutely seamless. In terms of sort of general trends in pest control, sometimes you feel like you are sponsored by the weatherman. It does go up and down according to climate. There is no evidence at this point in time that 2016 will be an unusual year, positive or negative, based on the intel that we get, and we do track it, particularly in the States. Zika, as I mentioned, what can I tell you? I mean, clearly, it is a very serious problem at the moment, particularly topical given the Olympics. We provide mosquito control services in, well, probably 20 countries around the world, and we are seeing evidence in all of our markets of increased inquiries and customers who are concerned about the situation. But honestly, I would not put anything into your models for that. I think it may come, it may not. I am just pleased that we are in a position to respond to what is a very difficult problem out there at the moment. I do not see any big macro trends affecting the pest control growth rates. I think it is very similar to 2015 and 2014. Do you want to take France? On France, it is really about price. We have been pretty pleased with our ability to maintain volumes. We have lost some contracts, but we have won some contracts, won some quite big contracts. But it is really all about the pricing situation that really started with Elis and its IPO early 2015, even late 2014. In terms of general conditions in France, we are not seeing any big improvement. I think there has been some debate about macro environment being slightly better, but we are not particularly seeing that. But I do not think it has got any worse either. In terms of the pricing situation, it is not as ferocious as it might have been late 2014, 2015, but it is still pretty intense, and you do get the impact of that pricing impact flowing through in the portfolio. We are expecting the kind of pricing pressure to remain strong in 2015 and 2016. This is why we are pursuing the quality program. It is all about retaining customers, retaining the customers we have got, improving the quality of what we are doing, so that trying to take price out of the equation to the extent we can, improving and maintaining margins that way, because the market remains pretty difficult. Hi. Andy Grobler from Credit Suisse. Just a couple if I may. Firstly, a much broader question. Historically, Rentokil struggled a little because pricing and/or service levels were not at market levels, and you faced pressure on gross margin. You had to offset that with cost cutting. Now that the big restructuring programs are done, where do you feel you are versus the market in your bigger operations in terms of service and price? Then secondly, on the quality program that you talked about, one of your competitors has made fairly significant improvements in margins in their workwear business over the past five or six years. What do you think the opportunity is there for margin improvement in a more normalized market? I know France at the moment makes that a bit difficult to answer, but over the next three to five years. I will take the first one. You take the second. Thanks, Andy. I am not sure whether your question was just about workwear or across the group. Across the group. Across the group. Okay. We'll start there. Situation varies by market, and it varies by, excuse me, by business line. In pest control, we are typically the market leader. We're not market leader in every market, but we're typically the market leader. In 40 of our 70 markets, we are. We're certainly the brand leader. Our service levels are the best in the industry. We can benchmark that. We do benchmark that. We hire consultants to give us customer feedback on our own business and our competitors' business. I'm very confident that for pest control, service is outstanding, and pricing power varies by market, but I would say it's not a bad place to be, Rentokil, brand leader, market leader, service leader in most of our markets. I would not suggest it's easy, but I think it's a good position. Hygiene, a little more mixed, I would say. Service level's very good. Again, we've benchmarked those. We're in 45 countries in hygiene. We're market leader in half of those. Brand is less important in hygiene. Service is absolutely critical in hygiene. If people don't turn up and do the service, you tend to get customer issues very, very quickly. So, we focus very much on service. Again, I would say our ability to get price increases through the portfolio is pretty good in most markets. Certain markets, it's a little difficult. Asia, historically, has always been a difficult market to get price through. I'd say continental Western Europe, certainly France, Benelux, very, very difficult to move much on price. On workwear, that's the area that I've said before that I don't feel that our quality is where it needs to be. That's not saying that I think we are worse than our competition, because our benchmarking tells us we are on a par with competition. But what we firmly believe is that unless we become the quality champion in the marketplace, unless we can give customers reasons to pay more for that service, then we are competing against other players that are offering a similar service. So, that's our thinking there. Certainly getting price increase through the workwear business is exceptionally difficult. I mean, Jeremy's given you the answer on France. France is our tough nut to crack, but our sales are up in France, our customer retention is up in France, our operational KPIs are improving in France, and our profits are down in France. So, where's the bit in the middle? It's price. It's very much a margin squeeze that's going on there. So, great service in pest. Reasonably good pricing power, great service in hygiene, pricing power varies by market. Service has to improve in workwear. That's what the quality program's all about. Limited pricing power, very, very tough market forces. That's my, I'd say fast, it wasn't very fast, that's my summary. My answer to your second part really builds on that. If I've understood which competitor you're talking about, I think they've done very well. I think they've done very well in terms of the way they've improved their margins over the last four or five years. But it's highly correlated to the markets they're operating in, and they are operating in markets where that pricing opportunity has been stronger than ours. When we look at our workwear business, our margin delivery is completely correlated to the markets as well. So Germany, the pricing opportunity's been stronger, the margins have been stronger. In the Benelux and France, where the economic environment's more difficult, it's been more challenging. I think what we're pursuing in terms of a quality program is not dissimilar to the competitor you're talking about, and it will help us maintain our margin delivery in those difficult margins. That's the biggest reason behind our guidance for Europe in 2016, in terms of that reduced level of profit decline because of us pursuing that policy. So I think it's the right thing to do. As Andy said, it's the way of protecting the margins. But in those markets, I think it's the pricing environment that's the largest driver of the margin delivery. Hi, Emily Roberts from Deutsche Bank. A few from me, please. First, on hygiene again. Within the growth rate that you had there, the organic growth, could you give us some color on the volume versus price? More specifically, are your customers willing to pay more for the new ranges that you've put out? Secondly, on workwear, you're probably bored of talking about this, but are you more or less willing to consider a sale of your French workwear business than you might have been, let's say, 12 months ago, given the improvements that you've seen in the operations there? Finally, on North America, the 3% organic growth rate, are you pleased with that, or do you think that there's more that you can be doing there? Thanks. Thanks, Emily. The first one around hygiene and pricing. Generally, yes, to the answer to the question, are customers willing to pay more for the new products? Maybe not substantially more, but yes. The key thing in hygiene is selling more than one product into a customer. That's the key, I believe, that the new product ranges, because they all complement each other, and it's making it easier for us to convince a customer that they don't just need a feminine hygiene unit or a soap dispenser. What they need is a suite of complementary products. I think the honest answer is yes, we're getting better price, but we're also getting better margin being driven by concept selling, if you like, as opposed to just selling a product. I think your second question was, does the performance of France make it any more likely that we would want to sell the business? I've spent most of my life in M&A in one form or another, and my view has been unchanged in all of that time. You only sell a business for one of two reasons. You sell a business if you need the money. We don't need the money. You sell a business if someone is prepared to pay you more for that business than you can generate with your plan for your shareholders. I haven't changed one iota that, as I see it, our job is to generate value for shareholders, and we'll look at any proposal on any part of the portfolio if someone came in and made a proposal that genuinely, demonstrably created value for our shareholders. We are not dogmatic. There are no sacred cows in the way we think of the business. My answer is unchanged. No, I wouldn't say any more likely or less likely. The job we see it is to create value for shareholders. Your third question was organic growth rate in North America. I'm not sure how to answer that one. On the one hand, I think I'm immensely pleased and proud with what the American team have done in 2015. That's a big lift to do, Steritech, 13 acquisitions, improved profits by 20-odd percent. For me to say I'm disappointed that they got 3% organic feels pretty harsh. On the other hand, yeah, I think they need to deliver more organic growth rate in North America, and that's clearly what the plan is. We think the market, excuse me, we think the market grew at around about the same rate that we grew last year. It's quite difficult to pick those numbers because some of our competitors don't disclose organic versus inorganic, but we think the market probably grew about that rate. We grew more or less in line with market. Do I think that's good enough for Rentokil? No, I don't. We need to do better. Jane Sparrow from Barclays. One obviously on France, seeing as that seems to be what everyone else is doing. Given Workwear is a portfolio business, do we see a further step down in profits in 2017 versus 2016? Because obviously, we've had a couple of years in the Benelux following 2013 issues. Is it going to be the same in France? That's quite a long way off, Jane. I think that the pricing pressure in the portfolio, you're absolutely right, will continue to flow through, although it all depends on the rate of change in the market. A lot of that depends on where pricing goes in 2016. We're obviously doing everything we can in terms of the quality program, customer retention, and cost saving to mitigate that. So, our internal plans would be very much to make sure that isn't the case, and that's where we'd like to be in 2017, is to flatten out that profit trajectory. But it clearly depends on what happens in the market. If pricing stays flat, you could deliver 2017 flat on 2016? That's where we'd hope to be, obviously. Yeah. Yeah. On the general portfolio management, you exited the Austrian flat linen business and the Irish business as well. Is there any more of that to come? When does ongoing revenue become revenue? When do they become the same thing? We were looking at that last night, yes. There's nothing really significant, as you've seen in the Manage for Value quadrant there. It's relatively small. We had a good go at trying to clean that out in 2015. There may be some small disposals in there. But within the Manage for Value quadrant, we've pretty much dealt with everything that's in there. On that basis, subject to small amounts, I wouldn't see anything else out of that quadrant going in 2016. On the brand standards business within Steritech, a couple of months on, are you any clearer on what the scalability and potential of that business is? Well, I'll tell you, Jane, what I've told the team. We brought the head of brand standards over to address the top 25, and he's a very good salesman, I will say. By the end of the session, the whole top 25 were absolutely desperate to get into brand standards. We've said that 2016 is going to be a year of bedding in the business in North America and preparing market assessments for a future internationalization of brand standards. I do not want everyone jumping on a plane and going over to Charlotte to understand what brand standards is about, but I have got resources working in the center and working with businesses to figure out which of our international markets are most ready for the introduction of brand standards, market assessment, competitor analysis, talking to some of the international customers based in the States to see which of them would like the service that they get in the States outside of America, to put us in a position to take some decisions for 2017, depending on what that analysis shows. We love the business. It is absolutely everything we thought it was, but we are focusing on bedding it down in 2016, preparing the case for 2017, and we will keep you up to date if we decide to launch. Hey, morning. It is Joel Spungin from Merrill Lynch. Just wanted to come back on the comments you made around returns you are generating on acquisitions, and you mentioned obviously two that are below, and everything else is doing well. Can you just remind us what sort of hurdle rates you look for in acquisitions, and ideally over what timeframe you hope to achieve, and just to sort of put that in some context? Related to that, obviously, Steritech, in terms of the price paid, obviously looked nominally quite high relative to the profits it was making. You have obviously delivered on some of the synergies. Looking out further, are you still confident there is a lot more to come so that you do actually hit a reasonable rate of return on a sort of two to three-year view on that business? Well, I will go Steritech first and you can do the returns if you like. All I can tell you, Joel, is we have seen nothing about the Steritech business that causes us to change our view at all in terms of the quality of the business, the targets that we publicly have put out there, and our ability to get hold of those synergies and the timeframe over which we will get hold of those synergies. I said it was a brilliant business. I said it was the top of our list. We have been chasing it for years. Absolutely no regrets in terms of the business, the price, the case, the synergies. Still a lot to be delivered, a lot of heavy lifting that we have to do, but off to a very, very fast start. No, I really, really like what I see. You want to do the returns? Yeah, the returns, Joel Spungin. We are actually on page 45 of the packs. We have got the quadrants and the returns within each of the quadrants. So, 15% in emerging, over 15% in growth, 15%-20% typically we are looking for there. Round about 25% in Protect and Enhance, and 30% in Manage for Value. The two deals we talked about that were slightly below were in the Protect and Enhance. They were delivering high teens. So, above, if you like, the average for the group, but just not quite at the 25% we were looking for within that quadrant. The returns are based on a typical DCF model, but we do look very carefully at year three cash returns on cash capital employed to sense check the model. We did that with Steritech, and we produced those numbers in the announcement. But for all the deals, there is a kind of common sense look in terms of payback and cash returns in year three of the cash capital employed, just to make sure we are not kidding ourselves with the modeling. That is a good way of working out where they are going. That is what we use in Andy talked about the assessments we make as to where the businesses are on track. All the deals we looked at in that survey have been going for at least one year, and by the time you have got to two years to two and a half years, you have got a pretty good feel for where those cash returns are within a pretty short timeframe. That is pre-tax? That is pre-tax, yes, that is right. Hello. It's Hector Forsyth from Stifel. I think four questions. Hopefully, they're quite quick. Can you give the organic growth rate for Q4? 1.4%. 1.4%. Thank you. Do you think that you'll see that tick up during the course of 2016? I don't really. It's difficult to forecast organic growth rates. The targets we set, Hector, a couple of years ago said we expect this business to grow total revenue at mid-single digits, which we said probably meant 2%-3% organic and 2%-3% inorganic. I haven't changed my view, nor has Jeremy, that those are the sorts of numbers that we should be delivering out of this business. For France, we delivered 2.5% organic growth rate in 2015. So, I would be disappointed, Hector, if we did not improve on the Q4 exit rate, but very difficult to make a prediction seven weeks in. Okay, thanks for that. Retention numbers. You've alluded to change in retention. Can you tell us where you are overall in terms of group retention on the contract portfolio? They are about 1% higher year on year from memory. I will have to get back to you with the specifics, Hector, but You have given us the change, so it is there. Hector is asking what the absolute number is. 84, 85? It is 85-86, I think, but it is around 85, Hector. Okay. Just a sort of cautionary word there, not every company out there calibrates retention in the same way. Yep. Our retention rate is a fully blended, everything in. If you lose customers, gain customers, lose price, win price, that all goes through that. If you have customers go bust, that also goes through that. It is everything that is in there. If it moves on the portfolio, it is in our retention rate. That is not the way that everyone does it, notably not the way that some of our competitors do it. In Workwear, our retention rate, I am sorry, this is off the top of my head, but our retention rate is about 90, just over 90%. Okay, thanks for that. Sure. Can you talk about the benefit of fuel costs across the group, please? Sure. Fuel costs did benefit 2015, particularly North America, where fuel costs are much lower year-on-year. A little bit in the U.K. Less strong in Europe, where the EUR weakness against the dollar mitigated some of the fuel impact. Much less so over in Asia, where fuel is subsidized. What happened a lot was subsidy was removed. It was around GBP 3 million-GBP 4 million in 2015, and we are expecting some benefit in 2016, but probably about half of that, given where fuel prices currently are. Obviously, that can move around a bit, but we are benefiting from the reduced slope. If prices stayed where they are for the rest of the year, it would be in the GBP 1 million-GBP 2 million level for 2016. Okay, thanks. Finally, just can you give us an idea of what you are spending your CapEx on? Roughly half the CapEx goes into EFR in Workwear. We are spending about GBP 20 million or so on IT. About GBP 10 million or so goes into innovation in terms of looking at things like the Connect tools and the AutoGate tools that Andy talked about. The rest is broadly split between hygiene and pest in terms of CapEx for the pest and hygiene EFR. And- Motor vehicles, sorry, is within those two categories. Motor vehicles is a big part of the pest and hygiene. 20 million, is that kind of a good run rate? Sorry, 200 million. Yeah, 200 million is what I guided to, oddly enough, for 2015. So, I think it's a good run rate. We're reasonably focused on CapEx control, and that's part of the whole capital allocation within the quadrant. Like I said, some of the 2015 moved into 2016. There's some motor vehicle spend that's moved between the two years. But 200 million's quite a good guide. There's a little bit of an increase because of Steritech and some of the acquisitions, but that's around the edges. But 200 million, I'd say, is a pretty good number, subject to FX, but it's a good ballpark number. Thank you very much. All done? Thank you very much indeed. Thank you.