Rentokil Initial plc (LON:RTO)
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Nov 12, 2026, 8:39 AM GMT
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Investor Day 2018
May 16, 2018
Summary
Medium-term guidance targets 5%-8% revenue growth and ~10% operating profit growth. Priorities include a $1.5bn North American business by 2020 and scaling Asia and Latin America while improving density, retention and cash generation.
Morning, ladies and gentlemen. A very warm welcome to our Pest Control Investor Seminar. The purpose of our event this morning is to give you a much deeper exposure to Rentokil, which is the world's leading pest control company. Indeed, by the end of this morning, you'll know more about the wonderful world of controlling cockroaches, mosquitoes, rats, and bedbugs than probably you ever wanted to. As you can see from the agenda, the focus for today is on the significant growth opportunities that exist for Rentokil Pest Control over the next five years. This is a growing and attractive market. We have a consistent operating model driving growth through organic sales, as well as through improved contract retention, pricing, and the upselling of innovations to our existing customers. We'll also cover the people agenda, which we believe is a key enabler of future growth.
We'll outline our plan to create a $1.5 billion business in North America, as well as the significant medium-term growth opportunities in emerging markets. We'll also outline how we're working with best-in-class partners to create value through the use of technology in our business. We're then going to break into two groups. We're going to do that to see in more detail just a few of the opportunities presented by our innovation pipeline and our leadership in digital pest control. After the breakouts, we return to this room to focus firstly on our M&A agenda and how we continue to leverage acquisitions, and secondly, the business financials and our model for compounding growth. I'll then close the seminar with a Q&A session where the team will gladly answer questions on any of the sessions.
Talking of the team, Rentokil Initial has a vastly experienced international management team, and over the course of this morning, you'll hear from and get the chance to talk to around 15 of our senior leaders. I won't go through the biographies now, but the details are there just for reference. At Rentokil Initial, we believe in transparency, consistency, and simplicity. What you can see on this slide, condensed onto one page, is a summary of our RIGHT WAY plan and our medium-term financial guidance. We use this both internally and externally, and throughout today, we'll bring this to life as we deep dive into the various aspects of the plan. As I've just mentioned, the purpose of today is to give you a much deeper understanding of our pest control business, which accounts for 64% of our revenues and about 70% of our profits.
However, we also have two other very important divisions: Hygiene, which I will cover briefly at the end of today's session, which accounts for 19% of group revenues and 20% of profits, and our Protect and Enhance businesses, which in the interest of time, we're not going to cover today, but we will, of course, be very happy to take any questions at the end. I'm sure for some of you in the room, Rentokil Initial is a new name. However, we have a long and a proud history dating back to 1903 in hygiene and 1925 when Rentokil Pest Control was first registered. Obviously, over the last 100 years, there have been massive changes across our business.
Some things haven't changed at all: our commitment to scientific development, our fundamental belief that this business is about people rather than process, and our drive to ensure that Rentokil technicians have the best tools and the best innovations in order to deliver outstanding service to our customers. For those of you who might like a bit of trivia, just for a bit of fun, I checked to see the average speed of travel of that horse and carriage in London in 1903, and the answer is 8 miles per hour. The average speed across London today is 7.8 miles per hour, and New York, 4.7. I guess some things really haven't moved on as much as others. Let me highlight three key themes for today. Firstly, I believe we've got a compelling growth opportunity in pest control.
It's an outstanding industry with annual worldwide revenues of about $18 billion. According to recent independent market research, the industry is set for growth of around 5% per annum over the next five years. This market growth is being driven by a number of factors, including economic development, increasing regulation, particularly in sectors such as food processing, as well as an increase in pest pressure in many markets. Gary will provide further details on this shortly. Many of you might associate our industry with your own pest crisis at home, whether it's a rat in the kitchen, wasps in the garden. In fact, residential pest control accounts for about 35% of the global market, with a further 19% being termite-related. Commercial pest control accounts for almost half of the market, and it's this sector which accounts for about 80% of our revenues.
In this social media age, news, perhaps of a food product recall or a hotel or supermarket with a pest issue, that news travels very fast, potentially resulting in significant reputational damage and also now very substantial fines. Today, there are higher expectations in commercial pest control than ever before. That's why we continue to set new standards for service excellence through our market-leading technical training, our innovative products, and our digital tools, all of which you'll hear more about today. Rentokil is the world's leading and largest commercial pest control company with market-leading positions in around 50 countries. It's a trusted global brand, and it has core strengths in the higher growth, higher margin commercial sectors, which typically have zero tolerance to pests, such as food processing and pharmaceutical. Another key theme for today is our low-cost operating model and its multiple growth levers.
As a service organization, our model starts with our colleagues. Today, we have highly skilled people with world-class levels of engagement, but we've got much more to go for here. We've therefore begun a new Employer of Choice program, which you'll hear about from Vanessa. One of the great things about our model is that the majority of revenues are on a recurring contracted basis, typically for ongoing monitoring and preventative work. As you will hear from Alain Moffroid at Rentokil, we already know at the start of the year where 70% of our annual revenues will come from. The other 30% is one-off jobs, which are usually reactive inquiries to deal with specific pest problems. Today, you'll also hear and see much more about our innovation pipeline and, in particular, our leadership in connected digital pest control.
To date, we have over half a million customer locations and 23 million individual products in the field, all on our myRentokil customer portal. We have also installed over 60,000 of our Internet of Things rodent control detection devices in our customers' premises, and we are now taking this sensor-based technology into new pest areas such as insects. Obviously, the profitability of pest control businesses can vary tremendously, but very good margins can be driven in pretty much all markets around the world through initiatives such as service productivity and, in particular, through density building. At Rentokil Initial, we have a fundamental understanding of density, and this is a theme that you will hear much more about throughout the sessions today. Finally, you will hear today about our compound growth model. Jeremy will cover this in much more detail, but let me just pick out three things.
Firstly, we will outline the many opportunities that we have to drive cash conversion and margin expansion over the next few years. In addition to route density, levers to drive margins include the deployment of technology, customer retention, procurement initiatives, yield management, as well as a disciplined approach to pricing, contract management, and sales incentives. Secondly, as I am sure you know, the pest control industry is highly fragmented. We estimate there are approximately 40,000 pest control companies globally, with about half of those in North America. There are clearly good opportunities for consolidation, and I expect this to remain an industry theme for many years. We have a disciplined approach to M&A and a clear capital allocation model, which is focused on value creation.
Since 2012, we have acquired more than 170 companies in 48 countries, and Chris Hunt, our M&A Director, will outline how we continue to leverage acquisitions to drive profitable growth. Finally, there are two areas which I believe are particularly important to drive future growth, and I will update you on both of those today. Namely, it is the expansion of our business in North America, the world's largest pest control market, and our unrivaled position in emerging markets. In North America, we intend to create a business with annual revenues of $1.5 billion and margins of about 18% by the end of 2020. John Myers, our MD for North America, will outline our model today, which includes the combination of annualized organic revenue growth of 4%-6%, with acquisitions accounting for between 8% and 10% of growth.
These will be supported by a Best of Breed program that will drive back-office savings and other overhead efficiencies. Paul Cochrane, our MD for Asia, and Alain van Lidth de Jeude, our MD for Latin America, will then outline the strong medium-term opportunities we have in the emerging markets. In summary, our business operates in very attractive markets with high margins and excellent growth prospects. Our combination of brand strength, market position, operating model, and our leadership in digital and innovation means that we are well-positioned to drive our compounding model for revenue, profit, and cash growth over the next five years. To kick us off, first up is Gary Booker, our Director of Marketing, Innovation, and Strategy, who will cover the global pest control market. Gary.
Good morning, ladies and gentlemen. My name is Gary Booker, as Andy said. I joined Rentokil Initial at the start of this year as the Chief Marketing, Innovation, and Strategy Officer. I am here today to talk to you really about three things. Firstly, the overall size of the pest control market worldwide. Secondly, why it is a highly attractive sector, and a market that is set for strong continued growth. Thirdly, why Rentokil Initial is uniquely placed to exploit this and grow in both revenue and profit over the years ahead. Overall, the worldwide market is valued at $18 billion, with half the total market coming from North America. Europe represents a little under a fifth of the total, with Asia and Latin America combined representing the key emerging markets and now accounting for around 22% of the world's total and growing.
The market typically can be split into three clear segments. Firstly, the commercial market, which represents the largest segment with just under half the global total. This is the important business-to-business recurring contract area where both local commercial deals, national accounts, and global key account deals make up the market. Secondly, the residential segment, which makes up 35% of the market and is typified by pest control work done directly for end consumers in their homes. Lastly, the termite market, which is an important and significant sector by itself and represents $3.4 billion worth of business and just under 20% of the total worldwide demand. These three market segments are how the market has typically been classified and reported, but there is another new, important, and growing segment, which is the Vector Control market.
John and Alain will both be talking a little bit about this opportunity for the U.S.A. and for Latin American markets shortly, but we do believe this is a new and significant area for further growth. Looking at the market, we estimate the value of this new sector to be around a further $3.1 billion. In addition to the size and strength of the overall market across each of these segments, pest control is a sector that has shown strong and consistent growth over recent years and is set for continued further sustained growth over the years ahead, with a compound annual growth rate of 5% forecast through to 2023, driven by a number of key macroeconomic factors and taking the total market to around $23 billion.
Unlike many other markets, the pest control sector has not only in the past proved itself resilient to external factors such as global recession, but also has a number of strong macroeconomic factors which are further driving its growth across both the commercial and residential customer bases. Across the world, there are significant population growth forecasts with increasing urbanization and a significant rise in the number of people worldwide in the middle classes. The worldwide population is forecast to reach 8.6 billion people in just 12 years' time, with more and more of those living in increasingly concentrated cities where pest issues are most prevalent, and an increasing intolerance and expectation from these people that these issues be removed. In addition, climate change is causing an increasing threat from diseases spread by different pests, with many cities worldwide experiencing huge increases in rodent numbers.
In Paris, for instance, it is estimated that there are already 4 million rats in a city with a population of just 2.3 million people. As an aside, if there's just one word that you remember from all of today's presentations, I do hope it's the word ratpocalypse. The incidence of vector-borne diseases is also on the rise, with nearly 100 million cases of the dengue virus estimated in over 128 countries worldwide every year. Further to these factors, there is also ever-increasing regulation around the world, which is clamping down and tightening up on hygiene standards, food safety, and pest tolerance, a material and increasing cost to businesses worldwide of just under $6 billion from pest issues, and over a fifth of global businesses reporting pest problems, with significant reputational and brand risk.
Importantly, these macroeconomic factors apply equally strongly to both the fastest-growing emerging markets around the world and the largest pest control market in the world, the U.S.A. In common with the global picture, the U.S. market also has a growing population, increasingly concentrated around major cities, and the same impact on the pest population from climate change. In addition, it has a very significant endemic termite problem, with over 50 different species of termites now present, causing around $2 billion of damage every year, and a steadily increasing vector-borne disease threat, with cases of yellow fever now spread across 23 different states in the U.S. and an increasing presence of other viruses. Also in common with the global picture, North America has increasingly tight food safety standards and hygiene legislation focused specifically on the prevention of disease outbreaks.
Across commercial customers such as hotel chains, there is a wide-scale issue and recurrence of bed bug problems affecting 80% of all U.S. hotels and motels. On the residential front, three in 10 of all Americans report that they have had a rodent issue in their homes at some point, a number that's likely to get worse with the urbanization trend. In the emerging markets of Asia and Latin America, the pest challenge and the pest control opportunity is even more stark. Population growth is at some of the highest levels worldwide in these markets, and the urbanization effect with dense, packed, and dirty cities is most marked.
In fact, over 56% of the world's largest cities are forecast to be in Asia, with nearly 900 million people in this market making up the largest proportion of growth in the middle classes, and Latin America in general set for a population explosion. In addition to this, not only is Asia a significant growth market overall, with China, for instance, being another huge termite market with over a billion dollars of economic losses caused every year, it's also a region as a whole that has a dramatically rising vector-borne disease threat year on year, with a near quadrupling of reported cases in some countries over the last five years. Exactly in common with the more developed markets, these regions are also witnessing significantly stricter legislation around hygiene standards and food safety, with multi-billion dollar costs to businesses from pest-related problems and a growing trend of pest intolerance.
Lastly, from a global market point of view, it is clear to see the further opportunity for growth that exists. Across the world, with a total global market of $18 billion, on average, the spend on pest control per capita is around $2.40. This average is composed of marked differences on a region-by-region basis. If we look at North America, for instance, as the most developed and largest market worldwide, it has a total market size of $9 billion and a per capita spend on pest control of well over $18. Contrasting that, though, with Europe, this shows a much lower level of just over $4.50 per capita. This is even lower in the emerging markets of Latin America and, in particular, Asia.
Here, the spend levels per capita are considerably less than the mature North American market, both if one considers the total pest control spend as a percentage of GDP and in terms of the spend on pest control per capita in both Asia and Latin America, with potential opportunity in both of these latter markets for significant further growth. All of that data provides a very clear and compelling picture of both the current strength and future growth potential of the pest control sector worldwide. In today's presentations, we also want to present to you the reasons why we at Rentokil Initial are uniquely placed to be able to capitalize on this growth. To start with, Rentokil, as Andy has said, is the number one pest control brand in the world.
As you can see from the map, we have the best geographical footprint with our business of any player in this sector across the largest proportion of key markets worldwide, representing over 9/10 of global GDP. This has been a deliberate part of our growth strategy to build our global strength and footprint. In fact, we have a branded presence in 73 of the world's markets and a number one or number two position in 60 of these markets, and importantly, with our own owned operations, not franchises. That number is growing as our business worldwide continues to expand into new territories. We have entered 10 new countries in the last five years. In tandem with our strong worldwide brand position, we are able to leverage this global scale further through partnerships and collaborations with some of the world's leading food safety and hygiene bodies and associations.
We have partnerships and collaborations on projects with the Global Food Safety Initiative, the AIB based out of America, and the BRC based out of the U.K. This global footprint also means we are in the best possible position to win the business of global commercial accounts and to provide consistent account servicing to some of the world's largest and most prestigious consumer and B2B brands such as Mondelēz, Kerry, ISS, Sodexo, amongst many others. We are the best-known brand with the strongest global footprint and are best positioned for growth. To summarize some of the key themes for today, which we will cover in more detail in our other presentations and in our breakout sessions later, there are five key areas that we believe differentiate us from the competition in this market.
Firstly, our scale and global reach, with over 36,000 colleagues at the heart of driving our business in 73 countries. Secondly, our 90 years of heritage and experience and our specific focus as the experts in pest control. Thirdly, not only do we have the scale and expertise, we also deliver this in a way that delights our customers, with a global NPS score of +42, which in turn delivers a very high level of customer loyalty and customer retention. Then two final areas in which we believe we truly lead the market and which give us a market-leading edge versus the competition.
These are innovation, and this is an area where we have real strength, not only through our multimillion-dollar investment in our global R&D innovation center based in the U.K., with pioneering live insect and rodent behavior studies and the development of non-toxic solutions, but also through the long list of unique products that come from this investment, which are only available to commercial and residential customers from us, and which we continue to develop and commercially launch to give us real, genuine proprietary points of difference in the marketplace. In fact, in March this year, in the U.K. alone, we sold over GBP 1 million worth of innovation products to our customers.
Very importantly, our digital capability, which consists again of a number of proprietary connected innovations and technologies, including ServiceTrak, which gives us unparalleled operational efficiency, the myRentokil platform, and the deployment of our Connected Pest technology, which is already live in 33 countries with over 100,000 connected users worldwide. I am delighted to say that our work in the innovation and connected devices space has again been recognized just in the last few weeks with the prestigious 2018 Queen's Award for Innovation. We will be talking with you in more detail about both our North American market and our emerging market growth opportunities very shortly.
Then we have two breakout sessions later in the day where we would like to showcase more of our innovation and digital technology, which I hope will give you the chance to see some of these real differentiated innovations and products up close for yourself. Be warned about the bed bugs. That is all I am going to say. Bed bug video, be warned. Finally, to recap the key takeaway points. It is a very large market with North America as the single most important region. All markets are growing at a strong CAGR with particularly strong growth expected from Asia and Latin America. Not only is the market resilient to recessionary factors, but it also has strong macroeconomic drivers in terms of population growth, urbanization, climate change, tightening global standards, as well as increasing food safety regulation.
Against this backdrop, Rentokil is the clear number one pest control brand with the largest global presence across all continents, making us the best placed to consistently service multinational accounts and exploit the market growth opportunities all around the world. We lead the market not only in terms of our scale, but also our expertise, our service levels, and as you will see later on today, in terms of our investment in innovation and in the development and deployment of digital technology. With that, I would like to thank you for your attention and hand you over to the Managing Director of our Pacific business, Alain Moffroid. Thank you.
Thank you, Gary. My name is indeed Alain Moffroid. I am Managing Director of the Pacific, and I hope you understand my strong Aussie accent. I have got 10 minutes to take you through our operational model and bring to life some of its building blocks with examples of the Pacific. This model was actually put together first to explain to our colleagues how we make money and how everyone in the business contribute to that ambition. Increasing profit and cash sits at the very right of it, but to understand how we drive more of it, you need to go all the way back to the left and start with our colleagues and being an Employer of Choice, the subject of Vanessa’s presentation just after me. Recruiting talent, engaging them, keeping them safe, and retaining them is at the very core. We get that right, and good things happen.
We focus on the central part of our model, circled in red, and show you how by turning up on time and doing an expert job at protecting our customers’ homes and businesses, we keep them happy and drive customer retention, a key driver of margin accretion. Getting the people piece right also enables us to have a fully engaged sales force to drive jobbing and contract sales. I will take you through how we make it work for both small and large customer, a key capability of RI that allows us to benefit from a higher density than most. If we were to do just that, deliver on our service promise and drive sales brilliant, we would already be driving a good business. We would already have a growing business, which in our field comes with density benefits, a key driver of margin.
To further accelerate margin development, three key aspects beyond those, we drive productivity or efficiency of technicians by coding on the latest digital solution. We also increase price to recoup inflation, and finally, we keep overheads under pressure and leverage our global size where relevant. Delivering on our service promise, getting sales excellence supplemented by those three drivers gives us the recipe to profitable growth and the recipe to ultimately driving our profit and cash forward. Before I go any further, here is a slide of context to help you understand where I am going to focus my attention. Our business around the world is split 80/20 commercial/residential, and roughly 70/30 portfolio versus jobbing. Every dollar is important, but portfolio is where I am going to zoom in. It is the largest part of our business, and it comes with some distinct advantages.
The key one is that customers stay with us well past the length of the contract they sign. Based on our track record and 86% retention, they stay seven years on average. While they are with us, they generate more than one-third of our jobbing revenue. The contract we have with them allows us to raise price annually and keep track with cost increases, which overall means, as Andy said, we start the year having 70% of our revenue in the bank. Not, of course, from a cash perspective, but 70% we know we can rely on with the benefits of being able to resource plan for it. In short, our large portfolio gives us great resilience, especially because it is made up of a wide range of customers, both in the nature of their activity as much as their size.
We serve the local bakery as much as we serve Nestlé or Mondelēz with very large production sites. We also serve the big retailers with their thousands of supermarkets. I have taken Australian data to give you a better feel. We have, at the top, a group of 60-odd customers, each worth 100K plus, with 7,000 premises, representing 20% of our revenue. At the other end of the spectrum, we have 20,000 customers doing less than 10K each, representing 50% of our turnover. So, a very wide number of customers and premises across Australia, with no one customer over the 2% mark, which, having come from FMCG in a highly concentrated environment, I can tell you is a very welcome advantage. But beyond that, so what? Why is having such a large number of customers that relevant? The relevance is on the right side there, the density.
A great deal of our customers are within the same shopping center, the same street, the same block of buildings. It gives us a productivity per tech that is unrivaled in the market. I will come back on that a bit later. To be able to achieve such a density, you need to operate successfully at the two ends of that size spectrum. It requires different strategies, different skills, different people. We operate successfully at both ends, but the vast majority of our competitors cannot. How do we go about growing our volume of business? In other words, growing our portfolio. The best way to grow is unmistakably to retain for longer those we already have. We serve them already, we know them, we know how to best protect them. Their revenue is contracted and goes up every year.
Contrast that with winning new, which we do lots of and love to, but you need to dislodge competition, which comes with a certain degree of price competitiveness. The new sales will be rewarded with a commission for the salesperson. We then need to send a technician to install the job. The technician needs to learn the place. In short, we make more money on those we keep than on those we win, if we consider margin in-year. We estimate that every extra 100 basis points of retention improves net margin in-year by 30 basis points. This is why we have got a project called 90, as in 90% retention, or keeping our customers for 10 years rather than seven. It is a worldwide initiative that Andy has got into his top priorities for the business.
Now, to get to 90% retention, we've got a very clear plan, which requires us to deliver and delight at every touchpoint. Delivering on a service through our thousands of expert technicians, delivering on customer service when they interact with the office, and finally, delivering on account management. We've got clear KPIs measured and tracked to ensure we deliver the RIGHT WAY at each point. Everyone in the business is incentivized to get it right. 15% of my short-term incentive is on customer retention and Project 90. The same for my team, all the way down to technician, who can top up their revenue by achieving their customer retention target.
There isn't anyone in the business who is not working on retaining our customers for longer, which has allowed us to make progress over the last few years, with more to go this year and next to reach 90%, by which time we'll have to find another project name. The best way to grow is to retain the next best, of course, is to sell and keep selling an increasingly large number year after year. As we discussed, that requires distinct selling skills, depending on who you're talking to. Top end of the market, big customers, it's all about our expertise. It's about innovative solutions that enable to constantly raise the bar of protection. It's also about deeply understanding the customer's specific needs, side by side, and offering the best program that suits those individual needs.
Then, of course, it's all about account management and ensuring that the QA guys within those businesses know their jobs are safe and they can sleep at night. At the other end of the size spectrum, to get more of those many thousands of customers, we operate with a somewhat different model. Expertise and innovation still matter, of course, but the success lies into a clear sales recipe, and one that we've perfected over years and decades, one that works time and time again when you recruit new sales consultants. Recipe is codified, it's basic, and it works. We do know, for example, that a consultant who does six appointments a day will get four quotes out of it, and out of that, they will get two sales. So, we religiously track their activity level.
A tracking that has been made easy by the digital solution we've equipped our sales force with. Though, of course, the primary ambition of those solutions is to drive sales effectiveness by facilitating their planning and sales call. From accessing all the customer info from a mobile phone or looking at who could be up sold around the streets or suburb where they are spending the day, all those tools are reinforcing the ability to execute the sales recipe. The key one we're leveraging is a digital quoting and contracting tool that not only dramatically cuts the time needed to get a proposal signed, but also provides our consultants with the margin they're quoting at, which has allowed us, for the first time, to reward them not only on the volume of sales, but also the gross margin of the contracts they sign.
Final point of sales brilliance, and a key one, our many thousands of technicians around the world are incentivized to look out for opportunities and submit leads to their sales colleagues. It is also a key source of growth. We generated GBP 5 million of sales on the back of those leads last year, just in Australia. Last point I want to touch on is productivity. Density, as we said, is the key to it. With the amount of customers we have, many of our tech can park the van for the day and service their customers in the cities. But in more rural areas, they have to drive some more. The example here, 30 km between customers in country Victoria. The point is, between Melbourne and country Victoria, there is 1,500 basis points of margin difference.
The density is absolutely key, but then, of course, you still need to find the best way to go around your customers and deliver on the various contracts and jobbing commitment. We have developed our own tool which gets us the optimal journeys on a daily basis and pushes the plan to the tech's smartphone, on which a series of phone apps enable technicians to navigate their day. Literally navigate, thanks to Google Maps, record the work done, and visualize the myRentokil site maps. Those apps work seamlessly from one to the other, making life of technicians as easy as possible, which in turn enables them to better deliver for our customer and further contribute to our customer retention target.
All those tools, leveraging a high density, enable us to achieve levels of revenue per technician that are well above those of the market, and have contributed 1%-2% of margin improvement in Australia over the last two years. This is as much as what I wanted to share with you in terms of diving into those building blocks. In summary, Rentokil is a primarily commercial and contracted business with a wide distribution of customers, giving us both density and stability in the revenue streams. We are making good progress on retaining our customers, a key driver of margin. We are uniquely placed to service that wide range of customers with unrivaled expertise, innovation, and productivity. Finally, to come back to my very first point, the very corner of our model relies in being an Employer of Choice, the subject of what Vanessa will share with you. Vanessa.
Thanks, Alain, and hello, everyone. I am Vanessa Evans. I am the Group HR Director, and over the next few minutes, I would like to take the opportunity to show you how our journey to world-class Employer of Choice offers a significant competitive advantage in delivering sustainable, profitable growth. As you have heard already, Rentokil Initial is a large route-based service company. Our operating model is founded on our people and the quality of the service they deliver. We consistently talk about the right people doing the right things in the right ways for the benefit of our customers, colleagues, and shareholders. With over 85% of our colleagues on the front line every day serving customers, they really are our brand and our biggest asset, and ultimately the key to profitable growth.
I'll come back to this model you can see here later in the presentation, but simply, if we can improve colleague retention, thereby reducing the number of people we need to recruit and train, and most importantly, the time those people take to get to full productivity, this will have a significant impact by reducing costs, improving productivity and customer retention, and driving profitability. That's why we make people our number one priority, and why we're so focused on our journey to Employer of Choice. Being a world-class Employer of Choice allows us to differentiate ourselves through the technical expertise, quality, and service of our people. The technical know-how and service excellence is rewarded with satisfied customers who stay longer and spend more with us, which is key to our contract-based business model.
That's why we keep focused on five key areas: hiring the best people in a highly competitive marketplace, ensuring they're trained to the highest standards to deliver technical expertise and brilliant service, engaging and motivating them so they're passionate about what they do, rewarding and recognizing them for delivering stretching financial targets, and finally, retaining them, as loyal employees lead to loyal customers, which, as you've just heard from Alain, is key to our business success. Now I'd briefly like to show you how we're setting ourselves up for success in each of these key areas. With over 36,000 people across 70 countries and the need to hire over 5,000 colleagues every year, attracting and recruiting the best talent is core to our financial success.
Our strong external reputation, especially on recruitment sites like Glassdoor, which is a sort of TripAdvisor for job seekers, means we can attract high-quality candidates. I'm proud to say that in the Glassdoor 2018 Best Place to Work Awards, Rentokil came seventh out of 700,000 companies, outperforming the likes of Apple, Microsoft, and Amex. In addition, our recently launched global careers portal that allows potential candidates to access vacancies at the click of a button has increased applications by over 100% and reduced time to hire by 29%. Finally, and to ensure we have the best talent for the future, we've created graduate and apprenticeship schemes. The growing strength of the Rentokil brand as an employer can clearly be seen by the 500% increase in graduate applications over the last two years. All this means we can hire the best people.
As you've heard, at Rentokil Initial, we position ourselves as the experts in the industry, and our high quality and breadth of training underpins that brand promise. We know that well-trained, confident employees deliver a more professional and expert service, which our customers are prepared to pay for. That's why we've seriously upped our game in training, delivering over 680 digital learning assets in 2017 through our in-house award-winning L&D team, which allow our technicians to access training in the field, significantly reducing costs and downtime.
We have undertaken 75,000 technical training days globally, ensured every employee has received health and safety training, helping us maintain world-class safety standards, as well as training over 15,000 people on our new Lumnia fly catcher, which you will hear more about in the breakout session, and is now on track to achieve contract value in excess of GBP 20 million by the end of 2018. Our technical training, structured career paths, and online learning courses firmly set us apart from our competitors and give us real competitive advantage. Extensive research tells us that companies who both engage and enable their employees can achieve revenue growth of up to 4.5 times more than companies who do not. That is why we spend considerable amounts of time and energy listening to our employees, what they have to say through our Your Voice Counts employee survey.
As you can see from the chart, we outperform the Korn Ferry Hay Global High Performing Company Norm Group in all four key areas that drive business performance: engagement, enablement, motivation, and customer service, where we outperform by 17%. Engaging and motivating employees is even more important when we acquire a business. We put significant focus on implementing strong and effective integration plans to ensure consistent training, processes, tools, and standards that our customers have come to expect. You will be interested to know that following our recent joint venture with PCI in India, which involved over 5,000 people, we saw levels of pride and engagement in the new company reach 97%, and is a testament to our success in this area, and one which you will hear more about from Paul later.
Our colleague engagement and enablement gives us real advantage and a platform from which to drive both revenue and profit growth. We build our reward and recognition programs around the delivery of business targets. Our annual bonus scheme is based on delivering revenue, profit, and cash, and is aligned from the top to the bottom of the organization, ensuring real financial focus. Likewise, our performance share plan, extended to over 600 of our leaders globally, ensures colleagues have a vested interest in the company's success. Our frontline colleagues are rewarded for sales leads, which help to build route and product density, further increasing profitability. We focus on delivering highly competitive salaries that blend a combination of fixed and variable pay, allowing us to control costs whilst driving top-line growth. We also manage closely employment hotspots, where recruitment can become highly competitive, driving up both salaries and turnover.
Finally, we recognize employees for excellent customer feedback. Whether it is our First Class Awards in the Pacific or our RI Awards in the U.K., we make sure every colleague's top priority is our customer. Finally, retention. This is something we monitor and measure at a branch, country, and regional level. We all know employees join companies but leave leaders, and therefore, we have heavily invested in the training and development of all of our leaders to make sure we have the best. As you can see from the chart, our leaders score above the Korn Ferry Hay Global Norm on all 10 of the questions that make up the Line Manager Quality Index. They also outperform the Global High Performing Company Norm Group with an overall LMI of 78%.
And this has led to an overall company turnover rate of 14%, which is pretty impressive when compared to those in this and similar sectors, such as supermarkets and hotels, who are frequently experiencing turnover in excess of 100%. Workforce stability is at the heart of customer satisfaction, productivity improvement, and profitable growth. We know if we retain our employees beyond their first year, we are likely to keep them long term, and that is why we are focused on Project 365. Project 365 focuses on increasing short-term sales and service employee retention to 90% by 2020, and offers a significant business benefit, including savings on recruitment and training costs, reduction in unproductive time, increasing customer satisfaction, and creating an altogether better employee experience. As you can see, we have got a wide variety of actions underway across all our regions that we have already made strong progress on.
A very conservative estimate of the savings we have, we believe there are to be achieved from Project 365 is in the region of GBP 10 million per year. So a sizable prize to aim for, and one the entire organization is behind. In summary, at Rentokil Initial, we differentiate ourselves through our people. Great people who are trained, motivated, and inspired drive productivity and efficiency gains, deliver brilliant service and customer retention, reduce costs, and build a company that every employee can be proud to work for. That makes huge financial success, and is why our journey to world-class Employer of Choice is so important. Thank you. Now I would like to hand over to John Myers, our North America managing director.
Good morning, everyone. As you have heard, we believe that the North American market represents a really exciting opportunity for Rentokil. First, it starts with the North American market being a really large market that is projected to grow roughly two times GDP due to strong pest pressures and a marketplace that demands a pest-free environment in both residential and commercial sectors. Although the market is undergoing a roll-up, and we have certainly been a part of that, the market remains highly fragmented with around 20,000 companies out there. As the third-largest in the U.S., we have only an 8% share. In our view, these market dynamics mean that there is plenty of future opportunity for us to grow through a combination of organic and strategic acquisitions.
As Gary mentioned earlier, we think there are some very strong variables responsible for driving the growth in the U.S. market. First, a growing population dominated by a growing middle class, the rise of multiple pest species, some of which are really tough to kill and are potentially deadly, as they can carry life-threatening diseases. Climate change is also likely to generate longer pest growing cycles, which means longer pest demand periods. Finally, we believe that the increase in food safety standards and a general requirement for pest-free environments will drive stronger demand in the residential and the commercial markets. The Rentokil business within North America is anchored by our pest business, and it is supported by our auxiliary businesses of Target, which is our specialty products distribution business, and Ambius, our interior landscaping business.
We have 300 branch offices, and many of them are these low-cost virtual offices. We have 8,000 employees. The vast majority are field-based, and they are the ones that are providing the service directly to our customers. 75% of these services are tied to recurring revenue, which is a very helpful driver to our route density effort. Due to our expanded footprint, which is appealing to national account customers, as they want one or maybe two suppliers nationwide, we have been dramatically increasing our share of this growing national account marketplace. We think that we are well-positioned for the future growth due to our unique capabilities in a market that is growing each year at circa 5%. There are certainly a lot of data points on this slide, but I would like to point out a few key areas.
Over the last three years, we have generated strong revenue and profit growth, and we have increased the revenue of our pest business to over $700 million. This pest revenue growth has come from solid year-on-year organic growth rates in the 4%-6% range, supported by a very successful acquisition strategy where we have added 37 new companies from 2014 to 2017. We have already purchased six great companies and added $33 million in annual revenue in 2018. We realized long ago that there are certain profitable and growth-oriented sectors to be targeted. In addition to understanding their growth and profit potential, we also know which ones will stay with us the longest. Which ones are more likely to buy our other services, whether it is interior landscaping, our Vector Control offering, or brand assessments.
As a result, our strategy has been to develop proprietary service protocols and products to win a larger share of these sectors. As you might remember, in 2017 November, we bought a company called VDA. This is one of those strategic buys where we bought a specialized capability, in this case, Vector Control. We bought VDA because we think there is growing market in the U.S., but based upon some early analysis, we believe there is a multi-billion dollar global market opportunity out there for our Rentokil locations around the world. In addition, with VDA, Rentokil is now capable of providing service to all four of the key markets, whether it requires feet on the street, planes in the sky, or custom vehicles to provide the service. Excitingly, we believe that our processes and protocols are unique and transferable to every country where Rentokil operates around the world.
We believe that we have the ability to catapult the North American business to the next level, $1.5 billion in revenue, 18% margins by implementing a four-point strategy based on, first, becoming the Employer of Choice in the marketplace, a place where the best want to come to work and where they understand they can have a successful career. Two, growing all of our businesses organically. Three, continuing our highly successful acquisition strategy and remain the buyer of choice based upon our successful approach of integrating the businesses we buy correctly. Four, finally, by building upon our business as usual improvements by implementing a set of what we are calling transformational programs, those Best of Breed activities that bring a higher level of efficiency and effectiveness to our business.
Although we are constantly working on product and service innovation, and I really do believe those will be drivers to our success in the future, as Vanessa Evans mentioned earlier, we must never forget that we are in the people business, and our ability to attract the best candidates through great hiring processes and hold onto the best colleagues through superior training and development programs, we will make our results more predictable and higher performing. As you no doubt know, recruiting great talent is becoming more and more complicated, and once you have hired that great new colleague, holding onto them is a challenge.
Our focus is on improving our first-year retention rates to over 95% by implementing a strong onboarding program, by ensuring that the new colleague has a world-class first day, and once they are on board, that the initial training program is led by a certified trainer that works in their office. When you have a big market with multiple drivers that produce growth that is two times GDP, it is clear that you need a well-designed program to generate profitable organic growth as a key part of our $1.5 billion revenue and the 18% margin program. We believe that we are now the best provider in the world due to our VDA acquisition to solve our customers' needs for Vector Control. Our service footprint now covers 90% of the population.
This coverage, combined with our high-dependency commercial customer service capabilities, will continue to make us the supplier of choice for large national and global companies. The Rentokil brand is known in over 70 countries, and it is this well-respected brand, combined with our marketing efforts, will drive performance above our competition. Our product innovation capabilities are very strong, and they are driving a differentiated offering that produces more customer wins and higher customer retention rates. Coming up, you will hear more from Jeremy about the value of organic growth in improving profitability. In North America, delivering organic growth and the related two times profit growth rule is clearly a very important part of our plan to deliver an 18% margin by 2020. The third part of the growth equation is our M&A program.
During my nine-year tenure, our team has acquired over 50 companies, and we have developed a well-designed approach for targeting potential sellers, becoming their preferred choice, and delivering on the business cases that we sign up for. Our acquisition strategy targets customers that help us in one of three ways. First, adding new service territories to improve our service footprint for our commercial and residential businesses. Most recently, Milwaukee in the Midwest, Atlanta in the Southeast, and North Carolina in the Mid-Atlantic. Adding new service capabilities, as I mentioned, most recently our Vector Control capabilities through the VDA acquisition. Finally, improving route density in our low market share offices. Although Chris Hunt, our head of M&A, is going to talk extensively about our M&A program, I am going to take the next couple slides to share with you how share building and that type of focus really yields great financial results.
As you heard me say earlier, I think this is a great market, and it starts with the fact that it's very, very large. It's geographically very large and population very large, and the demand is growing. Although it's going through a roll-up with us being a leader in that activity, there's still 20,000 companies out there, and as the third-largest at 8%, we think there's plenty of acquisition opportunities. We're very strategic in our targeting programs, and now that our service footprint efficiently covers about 90% of the U.S. population, our primary acquisition targeting strategy is to add more of these high market density bubbles to this map so that we improve our route density and improve our gross margins. By the way, while acquisition prices are increasing, we continue to find companies that allow us to produce returns above our capital hurdle.
As Alain said earlier, increasing the market share in a low-share office drives route density and local profitability. Simply put, if we spend more time in front of a customer and less time in front of a windshield driving to the next customer, we improve our gross margins and our net margins. As a result, a key part of our acquisition strategy is to find companies that we can buy to build scale in our subscale offices. In the example shown in the top right-hand corner, we were able to greatly improve our margins of the combined entity as a result of a bolt-on acquisition. We've done about 20 of these over the past five years, and we have a very strong pipeline going into the future.
The final piece of our plan is tied to Best of Breed programming. While many companies focus on what they have always done, but they try to do these things a little bit better next year, we have also identified what we are calling Best of Breed programs. These programs are meant to transform our business processes and improve our cost structure. Our focus over the past few years has been on procurement, back office efficiencies, our branch operating structure, and service productivity. As you might imagine, to be able to deliver this type of transformation, we will need to transform the IT systems that we use to run the business, and we expect to have the following key areas in place by the end of 2019. First, a migration to a single operating system for our pest business and products businesses.
Upgrade the software that our customer service colleagues use to support our customers and the field colleagues. Implement a state-of-the-art piece of proprietary software called ServicePlus that has been used by Rentokil in other countries to get that harder-to-deliver improvement in gross margins through better route density. Finally, upgrade the software and hardware used by our technicians by converting to another proprietary piece of software, ServiceTrak, that once again has been proven in other Rentokil countries. Up until now, I've been describing the steps we have been taking to deliver the GBP 1.5 billion revenue and 18% profit program. Here are the numbers that will result from those efforts. You will see that I've separated our pest assumptions from the other businesses. For our pest business, we are modeling the delivery of 4%-6% organic growth per year, along with M&A growth of 8%-10% per year.
Based upon our past results for organic growth and M&A growth, these are very doable assumptions. As it relates to the other businesses, we have assumed no M&A growth and a very modest 2.3% annual growth rate. All in all, a very deliverable plan. The purpose of this slide is to show the path of profit growth over the next three years that will produce an 18% margin in North America. You can see that the pest business is the main driver of the overall margin improvement in North America, which comes primarily from our organic growth programs and the delivery of our M&A programs.
As it relates to the M&A program. While most of the companies that we buy are initially dilutive to our core pest margins, we have become very proficient at purchasing wisely so that we can get them to our margin levels by year one or two, and they become accretive in years two and three. The final piece is our BOB programs. Although our BOB program plays a smaller role, it is clearly an important component for how we plan to run a bigger business and how we will deliver 18% margin. To close, simply put, the North America market is an excellent market with good growth opportunities for Rentokil. We have a comprehensive and well-thought-out plan to create a $1.5 billion revenue business through profitable organic and acquisition growth that generates 18% margins by the end of 2020.
We have been on this journey for several years now, so we understand the complexity of the plan, and we have the right team and structure to deliver this plan. Thank you, and now I have the pleasure to introduce Paul Cochrane.
Thank you, John. Welcome to everyone. As John said, I am Paul Cochrane. I am the Managing Director of Asia, and I would like to talk to you about the significant growth opportunities in the emerging markets of Asia. Rentokil Initial has been doing business in Asia for over 50 years, and during this time has developed an extensive branch network across 12 countries. Over the last five years, we have leveraged this platform to significantly accelerate growth, building a track record of delivering year-on-year sustainable revenue and profit growth. The platform allows us to scale quickly through bolt-on acquisitions, winning national and regional accounts, locking in customers through providing a consistent quality service from our local branches, and extracting excellent profit leverage from our revenue growth as we continue to build density around branches and digitize the front line.
Rentokil Initial has established strong market positions in all markets that we operate in. This is unmatched by international and regional competitors. It is important to note we hold market-leading positions in the majority of our markets, and we are number one in our key growth markets of India, China, and Indonesia. It is our intention to keep strengthening and extending our market-leading positions through organic revenue growth and targeted acquisitions. We estimate the current Asia pest control market to be circa $2.6 billion, growing to $3.5 billion over the next five years, a projected growth rate of circa 8%. This is underpinned by our core markets of ASEAN growing at 8%, and China and India growing at 10% and 12% respectively.
You will note that the spend per capita in our core markets is well behind North America, highlighting the significant opportunity we have to grow our pest business off the back of the rising middle class and growing hygiene awareness. We believe we are well-positioned in these markets to realize our ambition of GBP 300 million of annual revenue by 2022. How are we doing this? I would like to touch on the key drivers of our revenue and profit growth. Firstly, the rising middle class will drive increased demand for our services. Secondly, we have strong positions in sectors that will benefit from this increased demand, for example, food processing, and we have a broad range of services to meet the growing needs and concerns of our commercial customers and consumers.
Thirdly, this is underpinned by digitizing the front line to enhance customer experience for our digital-savvy consumers and improve internal efficiency to continue to drive profit leverage. Finally, we supplement our organic growth with a robust M&A program to build density in target cities and strengthen technical capability. Let me elaborate a bit more. By 2020, there will be 1 billion tech-enabled middle class in Asia driving increased demand for higher hygiene standards in the workplace and at home. Access to the web and social media is driving growing awareness of pest risks, highlighting the importance of food safety to protect family health, increasing exposure to Western standards, raising expectation, and the scrutiny of service providers. With increasing incomes, the rising middle class are prepared to pay for higher quality services, which Rentokil Initial provides. We are strongly positioned in higher margin, higher growth sectors.
For example, growth in food-related industries is driven by an increase in local legislation and international auditing standards to improve food safety, give export assurance, and ensure brand protection. Growth in residential, as I have mentioned before, is driven by the rising middle class, whose preference is to use a trusted service provider, and Rentokil is a trusted brand in Asia, to protect their family from harmful chemicals, mosquitoes that carry malaria and dengue, and their property from being destroyed by termites. Growth in the office sector is being driven by professional office workers demanding protection, safe working environments free of pests. As Vanessa Evans said, it is all about Employer of Choice, creating environments that attract and retain talent. Finally, in the hotel sector, international chains are working to deliver consistent global standards driven by increased travel and rising expectations of local and international guests.
Pest-free environments are a key priority to avoid negative press-related postings on TripAdvisor and the resulting damage to their brand. In addition to our sector play, service line penetration plays a critical role in driving organic revenue growth. We are moving from basic bundled general pests program, that is rats, mice, ants, flies, cockroaches, all bundled into one sell, to a range of add-on specialist solution services such as termite, mosquito control, bed bugs, and reporting to address the growing threats and customer needs. This gives us the opportunity to upsell a range of specialized services to our existing customers for both ongoing contracts and additional one-off jobs, thereby increasing the revenue and profit per customer. In addition to this, we are driving profitable growth through targeting top cities expansion. Using our approach of targeted sector mix, usually in clusters, customer tier development, and service line penetration.
Here is an example of Shanghai. We started with larger customers, multinational corporations, then we infilled around them with smaller customers, introducing new service lines such as the termite service. This increased revenue and profit per customer and service zone. We are also digitizing the front line to drive service efficiency and enhance customer experience. We carry out millions of services in Asia, with the majority of transactions being paper-based. We are currently in the process of migrating the business to a digital platform, which is app-based, and Jeremy Townsend will talk about that a little bit later, which will significantly improve service productivity, back office efficiency, and enhance the customer experience by giving them access to real-time service information and reporting. Digitizing service reports is phase 1.
The digital platform can be scaled to increase technicians for service leads, deploy cost-effective training, and create new service lines such as information as a service. That is reporting that we sell to clients. We will continue our M&A strategy. We will continue to acquire and integrate small businesses for capability, density, and scale. We have a strong pipeline, and we have closed over GBP 11 million of deals in Q1. Now to the real exciting opportunity, India. In India, we are focused on creating a GBP 100 million revenue business with GBP 20 million operating profits by 2022. The JV with PCI was completed in March 2017. We are now number 1 in India with a strong brand and national coverage with 272 locations, 4,600 service technicians, and over 130,000 customers. We are well-positioned to accelerate growth in this market by applying the strategies outlined in my previous slides.
This is an outstanding medium-term opportunity to deliver profitable growth in Asia. In summary, we are well-positioned in large, rapidly growing markets. Our ambition is to create a GBP 300 million pest business by 2022. Asia will have 1 billion tech-enabled middle-class consumers by 2020. This represents a significant opportunity. Rentokil Initial Asia has an extensive branch network across 12 countries. No other competitor has this footprint. We have a track record of delivering strong revenue growth with excellent profit leverage. Finally, we are accelerating the rollout of our digital platform to drive efficiency and enhance customer experience. Thank you for listening to me today, and I would like to introduce to you Alain van Lidth de Jeude, our managing director of Latin America. Thank you.
Buenos días. I'm Alain van Lidth de Jeude. I was previously the MD of our pest businesses in Europe. We have an ambitious CEO, and he's sending his disciples around the world to preach pest control. That is how one day I landed in São Paulo in 2012 and became the MD of the smallest, but the most ambitious region in the world. Prior to 2012, we didn't have a single activity in the whole of Latin America. However, the environment is excellent to pest control. First of all, the demographics, you heard it. Latin America today is the most urbanized population on Earth, and we love that because that brings density. It is also, after Africa, the second youngest population on the globe, and it has a fast-growing GDP. Beside that, the climate, the temperature, the humidity is ideal to all pests.
The markets are very fragmented. They are still unsophisticated. Above that, there are no market leaders in those markets. That position of market leader has to be taken and getting all the advantages that a market leader can get. We estimate the pest control market in Latin America to be about $1.4 billion, although still a low average spend per capita. However, there were risks associated in entering those markets. Completely unknown, unfamiliar to us, no help, no support. We didn't have any management, and the distance in Latin America are very long. Taking a flight from Santiago to Mexico is as long as from London to São Paulo. We had to put a strategy together, which wasn't rocket science and basic common sense.
First of all, we didn't have the ambitions to cover the whole countries, but only to enter where the population lives in the large urban areas. Two, and that was a prerequisite, we needed key management. We wouldn't compromise on this criteria. They are key to our success. Three, we identified those urban areas where we believe there's the most potential to be quickly successful. Fourth, we wouldn't take any risk and start with exotic activities, but only to start with our basic control activities, and on top of that, build other activities. So, where are we today since 2012? We are now operating in nine markets. We are covering seven of the 10 largest urban areas in LATAM. We have done 19 acquisitions. We have a GBP 45 million business already, and we have a double-digit profitability.
We are already market leader in four markets, not the least in Brazil. In all the other markets, we have either the second or the third market position already. So, how did we achieve that? First of all, we maintain always our view of building density and to operate in the large urban areas. I told you that we are market leader in Brazil, undoubtedly, but we operate only in four cities. Keeping focus on density, on urban areas is also key to our success. Two, and that's where you see the strength of the Rentokil business model, every time we enter a new market, we do not drastically change any activities we are acquiring, but we are feeding those teams with our Rentokil knowledge, with our Rentokil practices. That is generating strong organic growth, as you can see on the slides.
Organic growth, which is significantly above market growth, which is significantly above GDP growth, and which is significantly above any growth in our mature markets. This is clearly showing the added value a business Rentokil model has when it is entering a new market. On top of that, when you do acquisitions, M&A activity, you have exponential growth, as you can see also on the slides. I don't have any reason to believe that this trend would change in the near future. On top of this, we have a fantastic opportunity, which is in Brazil. When you Google the most deadly animal on Earth, you won't find the tiger, you won't find the crocodile, you won't find the lion. You will find a mosquito. That's not our invention.
It might be Google's invention, but that's what you find on Google when you do it, the most deadly animal on Earth. Brazil today, there are 5,500 cities. The protection of that population against mosquitoes so far has always been done by the Brazilian authorities. They have 97,000 full-time employees every single day trying to protect the Brazilian population against mosquitoes. Despite these enormous resources, they have every year 1.5 million dengue cases, and that has a cost to the Brazilian community. The average cost of every dengue case is about $1,000, a cost to that community. The Brazilian authorities, the Brazilian government, has decided to reverse the model and to outsource the pest control activities. We believe we are best placed to get a big piece of that new market. That market, we estimate about to be $1 billion for every year.
Why do we believe that we are best placed in that upcoming opportunity? First of all, we are already market leader in Brazil. We are familiar with the environments. We have a full Brazilian team in place. You might remember, we were the sole pest control provider during the Rio Olympics, a very difficult, complex environment where you couldn't spot a single mosquito, and that's what we have achieved, and that's what has been spotted by the Brazilian authorities. It was not only the Rio Olympics, also other large events in Brazil today, we are also protecting, like for example, Rock in Rio. We have also the technical capability, but we are also the only one having an expertise of around 70 countries in the world. There are no other competitors having that footprint. Today, we are already in talks with that Brazilian governments.
We are putting resources in place, and we are preparing ourself for that huge opportunity that is upcoming. In a summary, we maintain our focus on urban areas. That drives density, it drives profitability, it makes control easier. As I told you, we are not yet covering all large urban areas in Latin America. We have still a few to go. We will continue to do that successfully. As we are experiencing exponential growth since 2012, we need and we are building regional capability in order to support that growth. We will continue our M&A activity and even seeking to accelerate that activity. Our ambition is to create a GBP 150 million business in 2022, and that's without the Brazilian opportunity. We have a huge opportunity in front of us. Thank you very much. Jeremy, after you.
Thank you, Alain, and good morning, everybody. We have already seen a number of presentations this morning, the importance of digital technology in our business. In this session, I am going to look at the investments that we have been making to create value for shareholders through a better customer experience, a better colleague experience, and through reducing back office costs. First, let me start with the customer. We have had customer portals linked to our commercial customers for several years. These help drive strong communication, linking the customer to appointments, service visits, audit reports, recommendations, invoicing, and account management. Our portals are deployed in 33 countries around the world, and we have 100,000 currently active, and we plan to have all of our commercial customers on our myRentokil portal by the end of this year.
As Paul highlighted in his presentation, we believe that our investment in better customer communication through digital portals drives a better customer experience, which ultimately drives stronger customer retention. We are also investing in digital technology to enhance the customer experience through Internet of Things connected pest control devices. These are particularly relevant for high-dependency commercial customer, such as food manufacturers and pharmaceutical businesses, providing a 24/7, 365 days a year ring of steel pest control provision. The technology is at a relatively early stage of deployment, but nevertheless, we have 60,000 connected devices deployed in our markets, providing an enhanced service for our customers, helping us to build share in this area of the market. We will demonstrate how our connected devices work in more detail in the breakout sessions that are coming up.
As Alain and Paul have referred to, we have made real progress in the last two years, developing applications for our field technicians that can be used on everyday mobile phones. These apps help our technicians with appointments, customer information, and routing, as well as more efficient recording of service visit information. As well as enhancing the efficiency of our field staff, we have saved a fortune and a few forests in lower paper usage, improved back office efficiency, and we expect the cost of in-field devices to reduce by over GBP 6 million by transitioning away from the use of PDAs. We started with our hygiene staff, where we currently have around 2,000 technicians using the app, and we have plans to roll out the app to 6,000 pest technicians this year.
As Alain mentioned earlier, as well as making the lives of our field staff easier, we have also developed a suite of in-house apps to help our sales teams be more effective. These sales apps cover the whole sales process, from lead and pipeline management to quotes and pricing, contract setup, and account management. The impact of the apps runs all the way through the P&L, helping drive sales and improve customer retention, manage gross margins through price management, and reduce back office costs through improved colleague effectiveness. Looking at the broader topic of back office costs, we have invested in group-wide systems over the last five years, with the aim that all companies in the group are using a strong finance and operating platform. The journey is almost complete, with the final piece of the jigsaw being the replatforming of our North American operating systems.
As John said, this is due to be completed in 2019. As well as ensuring that we add up all the numbers correctly, a consistent platform helps us to drive back office effectiveness in functional areas such as finance, admin, and HR, gaining scale economies across our regions and the group. Over the next two years, once the replatforming is complete, we plan to put the systems into the cloud, which should reduce costs further, as well as creating greater opportunities for data management and the provision of business intelligence. Linked to the whole world of IoT and cloud-based systems is the area of business intelligence.
The data that our connected devices create, combined with the data from the technicians in the field and other publicly available data, provides us with a whole new area of potential efficiency gains, spotting pest trends more quickly, identifying pest risks more efficiently, and enabling us to provide our services more effectively. There may also be opportunities to use this data to enhance customer revenues, as we will discuss further in the breakout sessions. Another relatively new area that we have started to look at to reduce back office costs is the area of robotics. These are not really actually robots as depicted in the slide here, but are actually complicated computer algorithms that work between systems to carry out repeatable tasks. Once set up, the robots can carry out these tasks more effectively and efficiently than a human being, 24/7, 365 days a year.
Typically, the productivity is about three to four times that of a typical clerical staff. It is relatively early days, but we estimate the addressable back office and admin cost pool that could be directly or indirectly benefited by robotics is over GBP 200 million. There is plenty of opportunity for cost saving here. As the finance director, I am always trying to get the IT director to quantify the benefits of the investments we are making, but this actually can be quite difficult. What I thought would be useful here is to give some specific examples at a local level to show you how impactful our digital investment can be.
For example, in Germany, where we have introduced a connected pest device arising from new legislative requirements relating to secondary poisoning, our pest revenues have increased by 8% in 2016 and 2017, and our profits by a compound 13% over that period. In Indonesia, where we launched ServiceTrak in 2017, we have significantly reduced paper usage, improved the efficiency of our staff, and increased hygiene gross margins by 1.2 percentage points versus the prior year. In the U.K., where our investment in technology is the most advanced, we have taken around GBP 1.3 million out of the cost of our back office functions over the last five years, and that is before the recent introduction of robotics into the area.
While it is difficult to quantify the actual impact investment will have, what we can say is we think it gives us a leading edge in the market, should help drive increased customer and colleague retention, help protect gross margin delivery, reduce back office costs over time, and in summary, it is a key underpin to our medium-term financial targets for revenue, profit, and cash generation. Thank you, everybody. We will now have a short break for coffee. If we could come back at around about 10:30. If you look at your badges, you either have a red dot or a blue dot. The red dots will start with the digital leadership breakout, and the blue dots, product innovation. Thank you very much for listening, and if you come back at 10:30 in the rooms that are adjacent to this one. Thank you very much.
Hi, everyone. Welcome back. Hope you enjoyed the innovation and digital breakouts. I think Gary said he hoped you were all going to take away. Ratpocalypse. I reckon you probably all take away defecating bedbugs will be the story you will be talking about over dinner tonight. So far today, you have heard from Gary, you have heard about the global pest control market and the growth drivers that sit behind that. You have heard from Alain about how we use our operating model consistently to drive organic revenue growth, building stronger margins. You have heard from Vanessa all about how important becoming a world-class Employer of Choice is and why that is an enabler to long-term growth. John Myers has highlighted the major opportunity we have for profitable growth in North America, and Paul and Alain have talked about the excellent medium-term opportunities that we enjoy in the emerging markets.
Just before the breakouts there, you heard from Jeremy the ways in which we are beginning to create more value through the use of technology in our business. We are now going to move on to M&A, a significant part of our growth agenda. You are going to hear from Chris Hunt on how we are leveraging acquisitions to create value. Jeremy is then going to provide you with business financials, and he will take you through our compound growth model, and then I will come back, say a few words about our hygiene business, and we will move to our Q&A session. But over to you, Chris.
Thanks, Andy. I am going to tell you about what we look for in an acquisition, why people sell to us, how we create value, and share some numbers showing the impact of M&A on the group. But first of all, I wanted to set the scene by reminding you why M&A is a strategic imperative for us. Firstly, M&A delivers profitable growth. As you know, last year's interim results, we upweighted our medium-term financial guidance, targeting total revenue growth of between 5% and 8%, with operating profit growth of circa 10%. The group grew organically by 3% in 2016 and 3.7% in 2017. M&A supplements that growth as part of our plan to deliver our medium-term financial guidance. There are two types of deal that we use to grow. We target new cities and towns, not countries or regions, where we believe there to be good long-term growth prospects.
Recent examples of that include Rio, São Paulo, Riyadh, Guatemala City, and Dubai. According to McKinsey's analysis into the cities of the future, around 65% of global growth up to 2025 will come from 600 cities. Many of those mega cities of tomorrow are not big cities today. Here, we look for good local pest businesses that we can mold into an entry platform by introducing the Rentokil model, and when the time's right, bolt on other acquisitions to it. Our second type of deal is a city density builder. Here, we already have the branch management and operation, and we look to buy another local player. Combining the two gives us better density, and we also benefit from removing duplicate costs and properties.
There are plenty of targets available, as most markets are covered by a host of small local independent operators, so our challenge isn't necessarily quantity, it's quality. We built the capability to address that challenge. Let me explain a little bit more, firstly by recapping on what you've heard from our operators. Alain, Paul, and John told you about the two types of deal and how they impact their business. Alain explained how we enter emerging markets, where we target the large urban areas and take the time to understand the market and find the right platform with the right management. It's all about the quality of the business and the quality of the economics at this stage. Value is created by marrying the relationships and in-country experience of these guys with our technology, sales professionalism, and financial discipline to drive productivity.
Paul explained his deal mix is both new market entries and city density builders. Here, it's the quality of the portfolio and service technicians that's important. We often find that the customers trust the Rentokil brand, as it's a surrogate for quality, and benefit from the specialist services we offer, so value creation then focuses on rezoning to gain density and removing surplus back office cost. John's story is about infilling geographies to broaden our North American service footprint. Building North America, which is our largest growth market, to a $1.5 billion business is our number 1 M&A priority. We like strong local or regional players with excellent service reputation and long-tenured technicians. That's because, more often than not, we want to preserve the heritage of what we've acquired and improve it. So value creation comes from better sales and marketing practices and consolidating back office tasks.
We've got a strong track record of doing deals. This slide shows that we've done 149 deals since 2013. 123 of those have been in pest, so on average, we're executing around three a month, and that's an acceleration compared to a couple of years ago, where we were doing one or two a month. We couldn't point to a track record like that unless we built the M&A capability to identify, evaluate, negotiate, execute, and integrate those deals at pace. We do this with an experienced, dedicated in-house team. The front end of that capability, the identify and evaluate piece, sits in the markets, so we're close to the opportunities.
The back end, the deeper evaluation, deal structuring, and execution, sits in the center, with a small team of dedicated M&A specialists and links to our functional guys that help us to create value, for example, in insurance or property. Just turning to the slide in a bit more detail, you will see that the bulk of the deals, comprising around 85% of the spend, are in emerging markets and growth markets. We have entered 10 new countries since 2013, all of which are in the emerging segment, and we have done that by using the model that Alain described earlier, finding, acquiring a quality local player that serves as a platform for future growth. North America has been our highest focus, with John's area doing over a third of the total deals that we have done.
It is also worth mentioning that whilst we have acquired almost GBP 600 million worth of revenue through this program, our average acquisition size is quite small at about GBP 3 million of revenues, and we have done a fair few smaller than that. Size is less of a concern, provided it makes good commercial sense. Our deal flow is backed up by a strong pipeline, and that is one of the things that I manage very closely. Firstly, to replace the deals that we are doing, the more deals that we do, the more we need to find. Secondly, a strong pipeline acts as a buffer. It means we can turn down the less attractive deals. I would say we are in contact with circa 200 targets, and as you will see from my next slide, we are putting effort into roughly a third of those. We build the pipeline in a number of ways.
Firstly, we encourage the branch managers to identify good businesses local to them and make contact with them locally. Secondly, we have a targeted relationship management program where we meet people one-to-one or at the various pest control conferences and legislative days. There is also an active broker scene, particularly in the U.S., so a lot of the major deals these days are brought to us through that route. Occasionally, key customers will refer potential targets to us as well. Finally, some sellers approach us direct, given the reputation that we have built in the market. Our website has a thinking about selling your business page on it, and some deals come through social media as well. So, there are about 40,000 businesses worldwide, and as I have already said, the challenge is not necessarily filling the pipeline, it is about filling it with higher quality opportunities.
This slide sets out the number of live prospects we are actively working with. Some will be at the early stages of evaluation, others will be near to concluding SPA negotiations, and deals are very fluid, as you all know. So this is a snapshot taken at the quarter ends, and I think it is the shape which is interesting here rather than the absolute numbers, but it does show that the pipeline has expanded. John mentioned his plan to acquire between 8% and 10% of extra revenues each year, and it is pipeline volumes such as these that give me the confidence to stand behind his and everybody else's plan that you have heard of. Our 2018 group M&A spend targets are between GBP 200 million and GBP 250 million, given the acquisition of Cannon Hygiene.
Hopefully one of the themes that you've registered is that we look to buy quality businesses in target cities. It's not just about doing lots and lots and lots of deals. For me, quality boils down to two areas: quality in the economics and quality in the business. Quality in the economics is all about having a customer base with low levels of churn and high levels of recurring annual contracted spend. A good base is typically linked to good financial performance, and we like to see revenue growth at least in line with the market, and those revenues turned into profit and cash. You can tell a lot about a pest business by meeting its people and from local reputation.
We look for well-trained and motivated frontline colleagues and for strong managers with an operational bias, focusing on the one hand on density building and high-quality service, whilst on the other, good pricing and cost control to drive profit. We know where we're looking for, and here's where we're looking. In North America, our number 1 priority, we have great national coverage, but there's still plenty of areas where we can build density. We're also looking in targeted locations to expand our residential scale. But we aren't the only ones keen on North American pest assets. The market's consolidating, and there's strong competition for the choice assets from both the established players and new entrants.
It's generally known that prices have risen as a result, but as I mentioned, we look at each deal through the same model, work hard to understand the level of profit that that opportunity could yield in our hands, and preserve our financial discipline. We revised our North American returns criteria last year and now target a minimum 13% return for the best assets, still comfortably ahead of our cost of capital. In growth markets, we're concentrating on small to medium bolt-on deals, and we also see the potential to expand our non-general pest lines of business, for example, termites or commercial fumigation. In emerging markets, we see great potential in India, following on from the PCI acquisition, China, and Brazil too. Competition tends to be less intense, but prices are often high relative to the size of the business because sellers expect sustainable future growth factored in.
We are also spending time on understanding the hygiene opportunity in some of these markets. I've focused mostly on pests so far, but this chart shows we've been increasing M&A activity in hygiene deals too. You can see from this chart that the pipeline and the amount of revenues acquired is building well. And of course, in 2018, we've already acquired nine of Cannon Hygiene businesses from OCS. We look for similar characteristics in hygiene businesses as we do for pest, quality in the economics and quality in the business, and use the factors I've already explained to create value. But unlike pest, the businesses are B2B only, and there tends to be less competition for them, so hygiene deals tend to be a little less expensive. They also carry greater logistical issues during integration.
For example, if the acquired business uses a different shape bin or soap dispenser, we need to be sure our vans can accommodate that before we combine the routes. Turning now to how we create value through those acquisitions, I think about that in three parts. Firstly, there's the dispassionate, disciplined evaluation of the opportunity. The quality of the business and the quality of the economics I've already mentioned, and it's a big part of my job to ensure that we get this right, so only the investment-grade opportunities come through. Each deal is considered using a standard financial model, which forecasts future profits and cash flow to determine net present values, IRRs, paybacks, and multiples, all the stuff that you guys will be familiar with.
We reject roughly one in four at this early stage, either because we can't get the returns criteria to work or because we can't get comfortable with the steps necessary for value creation. Secondly, there's the integration part, and I'll just focus on three bits of that. Firstly, the role of current management. Good managers need to know what we expect them to do and how that differs from their job today. Often, these guys are customer-facing, so we focus on the tasks that we can shift off them early on. That gives them the time and latitude to go deliver the plan and deal with the customer, supplier, and staff situations that are prompted by the uncertainty. Securing customers is, needless to say, also very high on our list, and you'll have seen our digital showcase and product innovation ideas in the recent breakout.
Now, whilst we might not show them the bed bug video, they are the sort of things that can help with this. Thirdly, there's the synergy delivery. We don't tend to include revenue synergies, but they can come from areas such as introducing new service lines, using our sales model for efficiency and effectiveness, or national accounts leverage. But most of the value creation that we drive comes from cost savings. The savings come mostly from rezoning technicians and supervisors to get density, consolidating the property footprint, and removing duplicate back-office functions or contracts. Now, they're the sorts of activities that we do in our own business, so even if we don't get the integration exactly right, then we're very confident of driving a decent level of cost savings.
The bulk of the integration is completed within the first couple of years, although some can take a bit longer where it's pragmatic to do so. For example, we might delay a property footprint consolidation until the next lease break. The final part of this slide speaks to governance, and we believe in the mantra, "What gets measured gets done." So we review progress and challenge regularly. That starts well before the deal is signed. In fact, our investment committee reviews the business case ahead of any offer being made, and then again after due diligence, ahead of signing the deal. Every six months, we compare the financial case against business performance, and we consider whether the plan is on track, and that's something that's reviewed by the PLC board.
And then finally, there's a post-deal review after one year to understand performance versus plan in more detail and progress on the integration activities. That also acts as a feedback loop for the rest of the deal teams doing other deals to make sure that we're addressing common issues and benefit from the learnings of the cumulative deal flow. This approach in totality gives me confidence that as prices have risen, especially in the U.S., we're applying a prudent amount of financial and operational discipline to investments, and most importantly, that we're delivering against them. So if we're confident of creating value, the emphasis turns to positioning ourselves favorably as the buyer of choice. And for me, it's those selfsame disciplines when you look at them through a seller's eyes. We have a professional approach. We don't shoot from the hip.
We prefer instead to understand the data, make informed decisions, and commit to sensible timeframes. That means we deliver what we commit to. We're quick, clean, and simple to deal with. That comes from using dedicated in-house people, which speeds things up and helps get the genuine issues out on the table. Our guys live in the seller's world, so they'll likely have seen and solved the issue before, and that really builds trust, as opposed to hiding behind armies of consultants and getting tied up in a glut of third-party diligence reports. Doing the integration well means discussing the sensitive topics in an open and pragmatic way. For instance, many of the larger businesses still contain family members of the founders, friends, and loyal colleagues with decades of service. These people are key to the legacy, success, and reputation of the business and deserve to be treated with respect.
At Rentokil, we're proud of what we've achieved, but humble enough to learn from others. And for us, this means that we don't demand dramatic change on day one. We prefer to retain the sellers and have them help with a 12 to 24-month transition. And whilst we won't duck the difficult decisions, many of the sensitive people synergies in an integration can often be handled through natural churn over that period too. Now, of course, money talks, and we're prepared to pay up for quality businesses, because we know what quality looks like, and we've got confidence in our model to deliver those returns. That model has a strong track record built on six years of execution. John, Paul, Alain, and their teams have a great reputation in their markets. They're all about doing the right thing to grow the best pest control business in the long term.
Buyers trust us to do just that, and it's something we've done with countless others before. In fact, I have a number of examples where sellers preferred to sell to us rather than accept a higher price from our competitors. I wanted to put some numbers around the value creation for you. So this slide shows the analysis of deals we did in the 18-month period up to September 2016. It compares cumulative revenue and profit performance against investment case for the 48 deals executed in that period. The financial performance is measured up to March 2018, and we spent GBP 129 million on deals in this period. The other point to note is that I've excluded Steritech, as its size skews the trends. But rest assured, our expected IRR for that deal is in line with expectations.
In terms of financial results, you will see that all segments have met or exceeded their hurdle rates. We spent around 81% of the money on growth in emerging pest control deals and achieved returns on average some 500 to 600 basis points ahead of the target IRRs. It is a similar story in hygiene, although it is across a smaller number of deals, and we typically target a higher rate of return for those deals. Finally, in Protect and Enhance, where we spent just 2% of the money, we have overshot the investment cases, but again, it is a small sample. In total, the 48 deals are delivering revenue slightly behind our expectations and EBITA around 15% ahead of expectations. I would say there are three factors that drive that performance. Firstly, accelerated integrations or upsides that we did not have in the plan we had signed off.
Secondly, many of our deals include a portion of deferred payment. Some depend on having retained customers for a period of time, others are perhaps an earn-out. Those are both revenue measures, and since revenue is below the business case, we have not paid out in full. In fact, approximately 5% of the full cost of these deals has not been spent. Finally, everyone in the business owns the outcome. All the numbers get added to everyone's targets. We project manage the integration and monitor relentlessly. This sort of outcome comes from that level of alignment and effort. Jeremy shared this slide in our results presentations previously, and I thought it illustrated very well the other role that M&A has played, namely in reshaping the business.
On the left-hand side, you can see that since 2013, our net debt has fallen by around GBP 100 million, and that we have deployed the proceeds from around GBP 700 million of disposals and free cash flow into around GBP 800 million of acquisitions and dividends. The impact on the group has been profound. We have disposed of high-revenue, comparatively low-margin businesses such as City Link, Initial Facilities, and the bulk of our European workwear business, and recycled it into pest businesses in growth and emerging markets. On the buy side, whilst the bulk of the deal flow has been on small to medium-sized deals, we have also done a number of larger deals to bolster our capabilities. Those include Steritech, that bought national accounts capability, Residex, which bought national distribution across the States, and PCI, which bought pan-India coverage, roughly doubling the size of our Asia business.
As a consequence, our pest business is now around 64% of the total business, and within that, our emerging market pest businesses have tripled to 9% of total revenues. Our exposure to Protect and Enhance businesses is now around one-third of what it was four years ago. We have reshaped the business to focus on pest and hygiene, and our M&A strategy is all about making those businesses grow quickly and profitably. In summary, we have a very strong track record in M&A and a pipeline to sustain our activities. We have got a well-used process to evaluate, execute, and integrate the deals so we can deliver our know-how to the target, and we are very confident in the returns that we can generate.
We monitor the returns from the deals attentively to be sure that we're creating shareholder value. We're doing this in growth and emerging markets for Rentokil and increasingly in Initial Hygiene also. I'm pleased to hand over to Jeremy, who's going to explain our model for compounding growth in a bit more detail.
Thank you, Chris. Looking at the financial performance of the group over the last five years, we have demonstrated a strong track record of delivery against the financial targets that we have set for the business. Organic growth levels have improved significantly over the period, which combined with a strong M&A pipeline, driven compound annual growth of over 10%. This strong performance enabled us to increase our medium-term targets for revenue growth at the time of the 2017 interims to 5%-8%, of which organic growth is targeted in the range of 3%-4%. The drop-through from organic growth, combined with the profits delivered from acquisitions, has driven compound annual profit growth of 13.7%. Again, we have increased our medium-term targets for profit growth to around 10% per annum.
Free cash flow has been significantly improved over the last five years, with free cash flow conversion running at the level of around 90% over the last three to four years. Our operating model that Alain described earlier and our approach to capital allocation is designed to compound growth in revenue, profit, and cash. We look to drive our organic growth to improve density in our core categories, thereby improving gross margins. Through our low-cost operating model, we convert these gross margins into strong profit and free cash flow delivery. This free cash flow is then used to deliver progressive dividend growth, but in the main has been reinvested in the businesses, as Chris has described, using differentiated investment hurdles for CapEx and M&A. This investment further drives our organic and inorganic revenue growth, thereby compounding the cycle of value creation.
In the following presentation, I'm going to hone in on various aspects of the cycle, providing a little bit more color on how our operating model and approach to capital allocation delivers compounding revenue, profit, and cash growth to drive shareholder value. In the first part of the cycle, I'm going to look at a number of components that help drive improved profitability in relation to organic revenue growth and improved gross margins. As a rule of thumb, we look to convert each 1% of revenue growth into 2% of profit growth. On this slide, I've used actual figures from our North American business in 2017 to demonstrate this. On a blended basis, taking into account all of the lines of business, our North American business achieved gross margins of 38.8% last year.
Margins were higher in pest control services, but lower in products and our Ambius plants business. Below gross margin, there are other variable costs associated with revenue, predominantly related to sales and marketing. After these costs, the net variable contribution, or marginal drop-through, was 28.3%. If we take these actual numbers and then flex revenues by 1%, gross margin and other variable costs flex by the same amount. However, with no movement in fixed overheads, in this example, 28.3% of the increased revenue drops to the bottom line, which drives a 2% overall increase in operating profit. There are clearly some simplifying assumptions here, but nevertheless, the example shows how organic revenue growth drives roughly two times profit flow-through based on the nature of our cost base. The next area I'll focus in on is cost within gross margin.
To set some context, this slide shows the actual cost structure within gross margins for our North American pest control services business in 2017. As you can see, around 90% of the costs within gross margin relate to the colleague and his vehicle, or his or her vehicle costs, with the remainder being materials and consumables. So driving efficiencies in these areas is our main area of focus. There are a number of ways in which we are doing this. We've already shown you earlier some of the tools that we are using, deploying technology to improve the efficiency of our field technicians, both on-site and reducing the amount of time spent traveling from customer to customer. Alain has talked about the importance of density in our operating model, again reducing the time spent by our colleagues sat behind the windscreen.
Staff retention is another key area in improving our economics. Vanessa has spoken about the importance of our Employer of Choice program, and in particular, the need to retain year-one recruits to improve productivity, as well as to reduce training and recruitment costs. Outside of the technician and their van, the other area for us to focus on is the procurement of materials and consumables. As we grow in scale, our ability to reduce unit costs increases. As you've seen in the breakout sessions, we also have our own dedicated R&D center looking at more effective economic pest control. Our other core focus in relation to improving gross margins is yield management, and this involves a number of different aspects. First of all, we have to understand the key drivers of profitability in our business.
Using detailed analysis of dimensions such as route, branch, and customer, we ensure that we understand our margins across these areas. Secondly, we look to ensure that we have a disciplined approach to annual pricing, reflecting our gross margin analysis, and looking to ensure, as a rule, we cover our annual cost inflation with price inflation. A third key area, as Alain has already mentioned, is making sure our sales team's objectives are aligned with margin delivery. This is supported by digital tools, ensuring that sales incentives are linked to margins as well as revenues. A fourth area to note is overall contract and market management, seeking to identify markets that deliver stronger profitability overall, and looking to carefully manage our exposure to higher cost and higher risk markets, such as parts of inner city London and New York.
The next area I'd like to look at is fixed overheads and how we turn our profits into cash. Since taking GBP 12 million out of our central and divisional overheads in 2014, we have managed to hold central and divisional overhead costs at a broadly consistent level over the last four years. Through driving efficiencies in our back office, we have managed to offset inflationary pressure through cost savings. Our focus on our core pest and hygiene categories has meant that we've been able to drive scale economies, resulting in central and divisional overheads reducing as a percentage of ongoing revenues from 5.3% in 2013 to 3.0% in 2017. As I noted in my IT presentation, we are investing in back office innovation in systems and robotics to drive further efficiencies in this area.
The transfer of our Benelux and German workwear assets into the JV with Haniel in 2017 has significantly reduced the capital intensity of the group. The majority of our operational capital spend in pest control is on service equipment and motor vehicles, meaning that direct capital spend in this area as a percentage of sales is only around 3%. Spend on hygiene is higher due to the equipment for retail element in the washroom, resulting in capital spend as a percentage in sales of around 8.5%. Overall, the blended group figure is just over 6%, reflecting the mix of pest revenues in the group. In addition to the category spend, the group has spent around GBP 20 million per annum on investment in IT, around 1% of ongoing revenues.
As I noted earlier, our free cash flow conversion has improved to around 90% over the last three to four years. One area of leakage is spend on legacy provisions, including vacant property and environmental spend. This is forecast to reduce to a minimal amount by 2022. Without this legacy spend, free cash flow conversion would be in the region of 95%. So what do we do with our improved free cash flow? The strong improvement in free cash flow has enabled us to deliver a compound annual increase in dividends of more than 13% over the last five years. However, the first priority in our capital allocation model is a program of focused investment in M&A, compounding our operating model through the compounding of revenue, profit, and cash growth.
Chris has already talked you through our approach to M&A, so I won't repeat his presentation here, but I would like to emphasize some key points. We have a highly disciplined M&A model. Hurdle rates for all deals are well above our weighted average cost of capital. Our focus is on short-term benefits, with most of the value being delivered in the first two years post-acquisition through hard cost synergies. We've demonstrated a strong track record of delivery over the last four years, with no transaction below its hurdle rate. As Chris has already said, our pipeline remains strong in 2018. In terms of how our M&A model works, I thought it might be useful to run through a hypothetical, but nevertheless indicative model of how a typical acquisition delivers value.
In this acquisition, I've set out a situation where we buy a business, Gary's Pest Control, in a town where we have similarly sized businesses, both with $10 million of revenue. Before the deal, our branch is delivering 40% gross margin, with Gary's Pest Control slightly less efficient at 30% gross margin. Their sales costs and admin costs are also slightly higher, reflecting in part the family-run nature of the business. Due to Gary's higher cost base, when the deal is done on day one, the combined margins of the business are 16.5%, below the margins delivered by the Rentokil branch prior to the deal at around 23%. So diluted in terms of margins already overall, as John Myers was describing earlier on.
However, over the two years following the deal, we were able to drive service efficiencies between the two businesses, reflecting the increased route density, reducing the service staff required by over 10% through natural attrition, while at the same time affording a pay increase for the acquired staff to achieve wage equalization. Sales cost efficiencies are also achieved, and the branch admin and back office costs are all absorbed, resulting in net operating margins of 26.5% for the combined business and an incremental 30% margin on the acquired revenue. Over time, we'd expect to get further improvements in gross margin through increased density, as well as benefits from improved organic revenue growth. However, we don't typically tend to assume these benefits in our acquisition models. How do all these factors come together to drive value delivery?
To bring the story to life, on this slide, I have used the numbers that John Myers presented for North America to demonstrate how value is created by the model. Through the compounding of revenue and profit growth over the next three years, our plan is to deliver a business with $1.5 billion of revenues and 18% net operating margins. This delivers a business with cash returns on cash capital employed of around 14% and a return on net assets of around 18%, well ahead of our weighted average cost of capital. To finish off, I'd just like to reflect back on what we have done over the last five years to transform our business and its underlying financial metrics, and then take a look forward five years to see what the business might look like in 2022.
Over the last five years, we have increased the mix of pest control and hygiene revenues from 49% to 83%, helping our organic growth to move from negative levels to levels consistently in the range of 3%-4%. Net operating margins have improved from 8.8% to 13.2%, reflecting the leverage of increased revenues on fixed overheads, and despite an increased exposure to currently lower margin North American and Asian businesses. Profit delivery has significantly increased, as has free cash flow conversion and absolute free cash flow, allowing us to grow our dividends by a compound 13% per annum. We also have a stronger balance sheet with an improved credit rating and a fully funded pension scheme. What might the group look like in 2022?
Well, it is not difficult to envisage that based on the trend of the last five years, our core pest and hygiene categories will represent an even greater proportion of group revenues by 2022. As North America, Asia, and LATAM margins increase to be more in line with those of the rest of the group, this, combined with further leverage on the group's relatively fixed overhead base, should mean that the group's net operating margins increase further over the next five years. As we wind down the legacy provision spend, our free cash flow conversion should improve further from the current level of around 90%, which should in turn help us improve our credit metrics.
In summary, over the next five years, we would expect the impact of our operating model and our capital allocation model to drive continued compounding of revenue, profit, and cash growth to drive further shareholder value. I would now like to hand back to Andy to wrap up.
Thanks, Jeremy. I promise we are in the home straight. I admire your stamina, everyone. Before we take any questions, I am going to wrap up by briefly covering another very important part of our business, which is our hygiene business. It represents about 20% of the group, and it is a highly complementary business to pest control, also enjoying many market-leading positions. Let me start with, well, what actually is our hygiene business? If you think of a typical washroom, you will find hand soaps, you will find sanitizers, paper towels, air dryers, units on the wall, air sterilizing, air scenting, sanitary waste, nappy disposal bins, et cetera. In fact, there are about 30 different washroom products and services, and our business will typically rent the equipment to our customers and then supply the consumables to refill the units. Initial Hygiene operates in 44 countries around the world.
It is the market leader in over half of those. As you can see, last year, our hygiene operations delivered ongoing revenues of GBP 403 million. Like pest control, this is a contract portfolio business, but in the case of hygiene, we typically have 90% of revenues under contract at any one time, and the business has generated a four-year revenue CAGR just shy of 5%, with an organic growth rate CAGR of 2.7% over the same period. While we estimate that the hygiene services market typically grows broadly in line with GDP, we do also see opportunities for higher growth in certain markets. Firstly, global mega trends are driving demand, such as population growth, more women in the workplace, rising life expectancy, and as Paul mentioned earlier, the fast-growing pace of middle classes in Asia, where, in particular, clean air is a major concern for public health.
Today, we operate hygiene services across 12 countries in Asia, and given the size and the potential of the Indian and Chinese markets in particular, we have recently entered the India market through the Cannon Hygiene acquisition, and we have now also begun to pilot hygiene services across several cities in China. In addition to expanding into new growth territories, we are also developing new products and new innovations designed to gain share in existing markets. For instance, the recent launch of our GENIE washroom air fragrance product has grown our air care sales by 66% in Malaysia alone, whilst our premium scenting products are being targeted towards premium customers like hotel lobbies, high-end retail, cruise ships, and many other high-end customer environments. Of course, Initial Hygiene is also a route space business, and it shares a consistent low-cost operating model with pest control.
At the heart of this approach is our streamlined country operating model, one management team, one back office, one IT platform, together with shared procurement and product development, whilst the expertise of our frontline sales and service teams is always dedicated to either pest control or hygiene. This combined operation also drives best practice in sales between the two business lines, and in particular, now we have sales incentives now being based on gross margin rather than pure revenue. Today, we have just 10%-15% of our customers who take both pest control and hygiene services, and we clearly have a large existing customer base to target. Also, with the average number of hygiene products per customer premise being only around two, our three excellent product ranges, our strong pipeline of new products does leave us well-placed to increase our customer penetration further over the coming years.
In summary, our plan for hygiene is a very, very operational one. We have the best products in the market. We have a culture of service excellence for every customer every day. We have strong market positions. We have a shared digital expertise with pest control, and we have the leading hygiene services brand. At the heart of this plan is a focus on density building. That is the key to unlocking enhanced margins. To do this, we are focused on increasing, as I said, the number of hygiene products taken by each customer, but also on increasing the number of customers we have on each route. As Chris has already highlighted, this is being supported now by an increasing pipeline of hygiene acquisitions, such as the recent Cannon deal. All in all, this is a highly complementary business to pest. It has got a shared cost base.
It is a focus on route density and product penetration to drive margins, and where over the next few years, we would also expect to drive improved levels of growth, targeting to be above GDP. At Rentokil Initial, hitting our revenue, our profit, and our cash numbers is incredibly important to us. Delivering shareholder value and being able to sustain a progressive dividend is also very important. But equally important to us is the way that we treat our people, the service we deliver to our customers, the actions that we take to minimize our impact on the planet, and the support that we offer to those communities less fortunate around the world. Our mission as a group is to protect people and to enhance lives through keeping our customers free of pests, disease, and infection, and to do so in a responsible and a sustainable way.
On the slide there, I've picked out just a few examples, but our aim is to be a responsible, values-based organization, delivering world-class safety every day, a diverse workplace, outstanding innovations, and service levels for our customers, whilst reducing our environmental impact, but also protecting and enhancing the lives around the world through supporting local communities and supporting amazing charities like our partner charity, Malaria No More. So there you have it. What I hope you've seen and heard this morning is that we are looking forward to the next few years at Rentokil Initial with great confidence. Over the last five years, we've executed our plan at pace. We've been getting the business into shape. We've become very focused on pest and on hygiene, and focused on our growth and emerging markets.
Today, we've got multiple opportunities ahead of us by taking our proven and our scalable business model and our track record of consistent execution, and we're now ready for the next stage of our journey, which is taking a very good business and making it a world-class business. So with that, I thank you all for your attention. I thank my colleagues for their presentations, and we're very happy to take questions.
Eric also from Industrial Equity Partners. This is a year of above-average inflation, specifically to some of the cost lines you have, perhaps wages and transportation and fuel and so on. Can you, in a year like this, also compensate your cost inflation with increasing prices?
You want to do the price one?
Yeah. We are seeing some cost inflation around the world, but I have to say, in terms of our cost inflation experience in 2018, it's not having the impact that I think it is in other sectors. Places like the U.K., where living wage is coming in, these are areas we need to manage. The Employer of Choice initiative that Vanessa Evans talked about is a key way that we look to make sure we maintain staff generally and retain and use other things apart from just straight pay to take people in place. But across 70 countries around the world, the main way we approach this is to look at cost inflation expectations around the group and then make sure we're pricing in line with that. We're a relatively defensive category.
What we do tends to be relatively low down the P&L of most of our customers, and as long as we're delivering a good service, most of our customers are prepared to put a level of price inflation equivalent to cost inflation. We do not look to price above cost inflation, but we look to cover those costs typically with price inflation. We are not finding this to be a particularly big issue for us. The bigger issue for us in terms of employment costs or the employment area is making sure we can retain our people. In terms of fuel, we do have occasionally surcharges if the fuel costs are very volatile. We can go back to our customers and charge that fuel. But fuel is a relatively small part of our P&L, as we've described. It's really the employment costs are the highest.
And for the moment, at least in 2018, it's not been a major factor in terms of our margin delivery, but obviously, we continue to keep an eye on it.
Maybe as a quick follow-up, roughly what is price inflation in a larger market like the U.S. for you on your services a year like this?
So, we are seeing wage bill inflation of around about 2%-2.5%, that type of order. It is not such a big factor in terms of the P&L.
Thank you.
Hi, good afternoon. It is Sylvia Barker from Deutsche Bank. Could I ask three questions, please? Hopefully quick. First of all, in terms of your innovations and things like PestConnect, are you seeing the penetration first with larger customers and customers with multi-sites, and what is your penetration with SMEs at the moment? Then secondly, would you be able to quantify at all how much of your pest control revenues come from the various sectors that you have identified as high growth, like food processing and food service, pharma, et cetera? And then finally, in terms of acquisitions in North America in particular, I think there was one example last year of a deal which went to a competitor of yours, which perhaps would have been a nice addition to the group. Are you seeing that your, I guess, your perception within the North American market has changed at all?
Are you finding it easier to maybe approach customers, sorry, approach potential deals which previously might have been, maybe not put off, but at least they might have seen you as a U.K. company coming into the market, and perhaps that would have impacted the deal discussions. Thank you.
Thanks, Sylvia. I will go with the first one. In terms of the penetration of PestConnect, you are correct. The natural sweet spot for the products are what we call high-dependency customers. My view is, if you run a pharmaceutical plant, if you run a microelectronic plant, if you run a food factory plant, where the consequences of a pest problem can be really very significant, ranging from, in pharma case, massive problems, product recall, et cetera, or food infection, or losing your license to operate. My view is, if you are running those facilities and we have this product which is available, and you would prefer to have 12 visits a year by a service tech as opposed to the technology providing that added protection, we think that is a natural sell.
If you are running Joe's Pizza down Sevenoaks High Street, you probably do not need this technology, you probably do not want it, you certainly do not want to pay for it. Those are the bookends. But within there is quite a broad spectrum of other customers that over time we are pretty sure that we will sell the technology into. But at the moment, we would think of it as a premium product for high-end, high dependency. Your second question is too difficult for me, Sylvia. I could flip it to the CFO, but I do not think either of us have got the data in front of us. Can have a chat over lunch and probably pick up John over lunch, and he will give you some color on that, what is our penetration.
But it is a very, very detailed question, and I could probably style it out and give you an answer, but I am not going to do that. In terms of acquisitions, I do not think we have got a perception of being a British company. I think we have got a perception of being an amazingly good pest control company with a very strong brand. In the States, we look like an American company. They speak like John, with an American accent. They do not speak like me. So, we are a local company. And I always say that we are not a multinational, we are a multi-local. We are relevant in the cities in which we do business, the branches in which we do. There is all this density thing. So, the guys that John and his team meet up and interface with and compete with are in those cities.
Our branch manager will know the person who owns that local branch. We do not set out to acquire every single pest control company. We do not set out to acquire every company that has got pest in its title. We set out to acquire the ones that we want, the ones that are high quality, the ones that are in the cities that we have targeted, either as new entry cities or density builders. So, it would be surprising and worrying if everything that was up for sale, we go in and buy. So, we are not too worried about missing out on certain deals, but we typically know the deals that we really, really do want to win on. And all I can say is our track record is pretty good on that.
Thank you.
Thank you. Mattia Gervalet from Goldman Sachs. Three questions from my side. Firstly, on wages. I mean, you showed on page, I think, 69 and 118, that, okay, 1% of organic growth translates into 2% of, say, profit growth. But shouldn't we really think that given that half of your cost base is labor and you have 2%-3% on your wage increases, actually the operating leverage only kicks in above, say, a certain level of organic growth, i.e., above the 1.5, that's when it starts kicking in, or am I missing something? Second question would be just on the U.S. acquisition strategy. You seem to be quite strong on the commercial side, perhaps a little bit less strong on the residential and on termites. Are you looking to address that part of the market?
Would you like to get to the similar market shares over time, or are you going to specialize more commercial? Perhaps also, do you see big synergies between being both commercial or residential, or could you be very strong in one without the need to be strong in the other one? Lastly, on emerging markets, I think India has been mentioned several times this morning. China, I think, maybe once on one slide or twice. But then I see that now the size of the markets are fairly similar, i.e., also in China, it seems that pest control is significantly under-penetrated. Can you elaborate a little bit about what is the opportunity there and how do you see the opportunity for yourself in China? Thank you.
It's a good question on the wages, and I did say on my slide there were some simplifying assumptions. So, I was taking the overall cost base and then flowing it through. What I would say is, we haven't had an inflationary market in the last 10 years. Going back to my days in food retail, if you get inflation flowing through and you're able to cover it, if you've got reasonably good margins, actually you get a better flow through. So, if you can get price increases above cost inflation, that all flows through to the bottom line. So, it all depends on what the relationship is between your price inflation and cost inflation. Typically, we're aiming to match those two. So, as long as we can match that cost inflation with price inflation, we should be able to get that flow through.
But it's a good question, and it was one of the reasons why I said there's some simplifying assumptions there. You do have to get a little bit more nuanced into what is the price inflation in your organic and what's the cost inflation. Simplistically, if you assume you can manage the two, then we do get the two-to-one drop through. I'll take the second question, then maybe ask Paul to pick up the China question. Yeah, look, it's good to point to resi and termite. I'd say within North America, we are as ambitious in residential and termite as we are in commercial, purely because the scale of the opportunity is so huge. With a $9 billion market and big, big percentage in the States being resi and termite, we'd be mad not to be.
I would say 99% of the acquisitions that are available in the U.S. will have some level of residential, and probably 50% will have some termite. In terms of the synergies, they're very, very similar. There's no real difference. We typically have a branch structure where we will run residential pest control and commercial pest control out of the same branch. So the economics are very, very similar. For that reason alone, we're as interested in resi and termite. Outside of the U.S., the termite market is only, state the obvious, where there are termites. We don't have them here. There was one sighted in Cornwall, apparently, one termite about 10 years ago. Not enough to build a business around. Asia, they've obviously got termites. Australia, they've got termites. So that tends to answer the question, where we see that activity.
The control of termites, I will say, is very difficult and involves typically the use of very dangerous chemicals. So we have incredibly stringent standards that we apply in our business because these chemicals are lethal to humans. So we tend to be quite cautious around termite, but done well, there's no reason why you wouldn't. Resi, we're big in the U.K., we're big in Oz, we're big in one or two other markets, but we are predominantly commercial. So, the answer is yes, the ambition is absolutely there in the States. China, Paul?
Please go ahead.
Hello?
All right. On China, just look at China and India, for example. Both have similar opportunities. If you look at the Indian market, if you look at the China market, it is incredibly fragmented, so you have a lot of small businesses around GBP 1 million-GBP 2 million. If you look at the India market, we were very fortunate to buy essentially an established business, 68 years pedigree, which is PCI. Established, significant size, pan-India. It is allowing us to take the opportunity a lot quicker in India, where China, it is a lot more fragmented. So, the acquisitions are a lot smaller. Really fundamentally, that is the core of it.
You have two markets that have got similar opportunities, but in India, we have managed to buy a significant business, which allows us to leverage and grow that market a lot quicker, where in China, it is a bit of a slower burn around acquiring smaller businesses, building out density, driving organic.
Hi, this is Anvesh from Morgan Stanley. Two questions. First, if you look at the free cash flow from 2013 to 2017, that has been below the combined spend on M&A and the dividends you paid. The reduction in leverage is essentially because of the disposals. Going forward, arguably the M&A spend remains elevated, and you continue to grow the dividends. How do you plan to reduce the leverage? Can you just shed some more light on that, and what are the balance sheet restructuring options that you highlighted on slide 131? Second, you also highlighted the differential into the GDP per capita in emerging markets versus the North American market. Arguably, let us say, the cost to serve in markets like India and China is also very low, and the income per capita is also very low.
Realistically, what is the growth you see in pest controls per capita spend in those market?
I'll do this one.
Thank you.
You're right. At the moment, we're planning to spend. For 2018, for example, our M&A guidance is $200 million-$250 million. If you took our free cash flow from last year at roughly $170 million and $70 million in dividends, we will be increasing our net debt based on the current year. What I would point out, though, is the balance sheet has still got a reasonable amount of capacity. Most significantly in the timeframe we're looking at, we do have an asset that we're likely to realize in that timeframe, and that's our investment in the Haniel JV. We've got an 18% stake that, and if you make some assumptions around the realization of that, plus our continuing free cash flow, our credit metrics should improve. Certainly, on the basis of the free cash flow and those kind of free cash flow metrics should improve.
Those are the underlying assumptions.
Yeah, I mean, on the GDP one, I certainly hope that we didn't give you the impression that we think that over two or three years, the GDP per capita spend on pest control in markets in India and China is going to get anything like the rates in America. That wasn't the point of the presentation. I think it would be, in our view, pretty incontrovertible that there will be growth in that number, that that can only go in one direction. We're showing those by compare and contrast. So, over what timeframe and whether they ever get to those level. I mean, the interesting statistic you saw from the guys, John in America's got 8,000 colleagues servicing over $1.1 billion, and Paul in India's got 7,000 colleagues servicing GBP 50, GBP 60 million.
There's the answer in terms of Big Mac Index, if you like, relative values, cost of labor, cost of service. But the question I would ask is there anyone in the room that thinks that that number is going to go down, or is it going to go up? My view is it is as clear a no-brainer as there is that that is going to go up. At what pace, where it gets to, what the role of technology is in all of that, I couldn't tell you. We're not factoring off our growth plans, not factoring off a GDP model or a per capita model in that sense, but we feel utterly convinced that over the next few years, those numbers are going to go only in one direction.
Hey, it's Alan from Exane BNP Paribas. A couple from me. Firstly, just touch on the Brazilian opportunity around vector-borne outsourcing. You touched on that being a billion opportunity. I wonder if you can just give us sort of any additional granularity, how to think about timing. I mean, how much of that share could you get, anything that could be quite sizable.
Put in Alan's budget. Yeah.
Secondly, just following back up on North America, I wonder if you could just sort of update us on what you're seeing in terms of M&A multiples, interest, et cetera. I guess on one hand, you're seeing the likes of Anticimex going into the market, a bit more aggressive. You're seeing Rollins, which have typically been relatively low-key in terms of deals, doing at least one reasonable deal last year. On the other hand, I'm guessing sort of perception about rising rates potentially maybe cap some of the upside there. Then finally, maybe just on the U.S., just on the competitive landscape. I mean, one of the competitors, ServiceMaster, has had a bit more of a difficult time breaking up that business, new management coming in.
I mean, are you seeing any changes from the other bigger competitors in the U.S. that's changing the dynamics there at all or anything there? Thank you.
Thanks, Alan. With a slight degree of fear and trepidation, I will hand that question to my esteemed colleague and see how he answers it. We debated whether or not to include that to share with you. Given it's not a secret, given that the market exists, and given that we are in discussions with the government down there, and given they have made public statements to the effect that they are intending to do that outsourcing, we felt it was right and proper to share with you. What I will say is at the moment, today, we have put none of that revenue profit into our models.
Alain, like most of my operators do in this sort of situation, has said, "Well, it's either going to be a really big number or it's going to be nothing," because none of us know, are the government going to actually implement that outsourcing? If they do, with 5,500 cities, what's the right, how many cities they're going to adopt? What we're really showcasing is through expertise in a number of markets, through the acquisition in America of Vector Control, through an amazing experience with the Olympics down in Brazil. If the government want to go ahead with that plan, we are, I'd say, almost uniquely positioned to capitalize on that. Alain, is there much you can add to how much?
Yeah. I do not have that much to add. Explain that we are actually in talks with the Brazilian authorities. We are putting resources in place. We are preparing ourselves. We look to this as a midterm opportunity. You need to know it is not one contract, but these are 5,500 contracts that have to be negotiated, and we believe we are uniquely placed to give you a timetable. This year, I do not expect any new revenue coming from that, but within the midterm, 18 months, we should see the first realization or crystallization of this decision of the Brazilian government.
Thanks. M&A, again, it is difficult to say, Alan. As Chris had said and John had said, M&A multiples in America have most certainly increased. Whether they are increasing, I think, is a more of a moot point, and we can debate that. I think they have somewhat topped out and somewhat stabilized from what I have seen. Like I answered the earlier question, we are not trying to win every single one of those. We are trying to win the ones we really want to win. We have had one or two that probably got away from us that we would have liked, but I think we are still doing pretty well. I do not think it cramps our style. I do not think it caps the upside, as your phrase. Equally, M&A is, I would call it, is an opportunistic sport. You can only execute what is in front of you.
In some years, there might be a lot less, in some years, there might be a lot more. The fact that prices have gone up tends to mean that there is actually a lot more available because people are saying, "Oh, I want to get a bit of that for myself." I do not think, Chris has said the pipeline is full, John has said the pipeline is full. We have done 30-odd million USD of top line so far year to date. If you do the maths on the model to 1.5 billion- At the 8%-10%, you probably get to, I do not know, 60, 70, 80 million USD a year top line we are looking on average to acquire, and we have got, say, half of that in the barn after three, four months. Competitor landscape, maybe I will flip that to you, John. I think my view is, we always have competitors.
Every single market, we have got competitors. In America, we have got some pretty big ones. My sense of it is, being the scale of the country, being the scale of the market, and where we tend to bump into the big national players is on big national type account type work, as opposed to in the cities and the towns where there is already 10 other pest control companies available in that city or town in any event. So I do not really think we are seeing much of a change. John, is that fair or is it a little bit different?
No, I think it is fair. You probably could break the 20,000 competitors into three categories. The really big guys, and we are in that really big guy category. Then there is the regional players that maybe have concentrated in a specific city and done a really, really good job in a city. Then you have the mom and pop type size, which is spread throughout the country. I think when we look at it, you would probably say the mom and pop size are losing share. They are just not able to keep up with technology changes, digital demands by customers, and the like, so that is putting them at risk. The regional players are gaining share. They are good at what they do. They have got really good route density.
If you are in one city and you are doing, I don't know, $15 million of revenue in one city, then your route density is good, your ability to spend on marketing is really good, that kind of thing. The large players are doing really well for the reasons Andy mentioned. There is really only maybe four of us that have a national footprint, and when we talk to national and global companies, we are the only ones that can be talked to. So, we do well there. The short version is, I mean, we have to show up every day and do exactly what we are supposed to do to be competitive. The competitive landscape is not easy, and I think we are doing well. But every day we have to do just a little bit better to beat them.
Jane Sparrow from Barclays. Something on margin, please. Just on the North American margin, where you have got 420 basis points between now and 2020. The IT transformation, which would seem to support some of the efficiencies in that area, sounds like it is scheduled for completion more in 2019 than 2018. So, in terms of the phasing of getting to that 18% North American margin, should we expect it to be a sort of bigger step in 2020 rather than smooth progress between here and there? Secondly, also on North America, the cost of the IT investment that you are making, are they included in that North American margin or are they held in the sort of central regional overheads line? Finally, on the group margin, obviously in the last sort of five years, you have acquired what is basically 25% of your group revenues.
You have also had a big headwind from France, and you have also disposed of some of the higher margin hygiene businesses. As we look forward, should we expect to sort of see some meaningful improvement in group margin from here, given the sort of phase of the group that we are moving into?
Thank you, Jane. I will pick up all three of those. So, in terms of North America, the re-platform will be finished in 2019, but it has been ongoing. This is quite a slow process. What we are looking to do is re-platform the business, not onto Oracle or SAP, but the core system that we use in our heartland, J.C. Ehrlich, Pennsylvania business. We are doing it very slowly to make sure we do not have any big bang transition issues. So it is branch by branch, region by region. I would say we are about half the way through. One of the reasons why I think 2017 margins were the progress, if you look at John's slide on pest services, the progress was slightly slower. Some of that was the large amount of M&A we did, which tends to be dilutive.
But there was also an element as we input the, make the transition, you are investing in colleague time to train people up on the new system. So, you are right, there will be a phasing more towards 2020, but we should see some of that benefit in 2018 and in 2019, with large parts of the territories already being re-platformed. So, relatively, it will be more 2020, but there will be some in 2019 and 2018 as well as we transition across. In terms of the IT piece overall, I think I have already answered that. We are about halfway through. We do not tend to transform in the busy period, so we are offsite now that it has stopped snowing in North America, thankfully. We have stopped on the transition. We will come back to it in September, October.
Look to do that over Q1, Q2, and then we will be out again, and there may be some tidying up to do in Q4 of 2019. The group as a whole, you have seen what we have done with net operating margins over the last five years. There is a number of moving parts here. So, as I said, we would expect to get more scale economies as we grow revenue over our fixed overhead base. The relative proportion of pest and hygiene relative to Protect and Enhance should help margin overall. We said that we are looking to get the French business into profitable growth into 2018, which will stop that hopefully being a drag on margins in the same way as it has been in 2017. But then the slightly more esoteric margin component is what the mix of North America and Asia is relative to the group.
There has been a little bit of a drag as we are growing those businesses and getting density in there, but slightly counterintuitively, the weighted mix of those businesses slows it down in the while. If you look five years out, I am pretty confident those margins will grow because the mix of those businesses as those margin increases will drive pest margins up overall and group margins overall. But in the first year or two, 2018, 2019, actually as we are growing out PCI in Asia, as we are growing out North America, it is a more marginal impact. So, certainly as you look towards 2020, 2022, we should see margins overall improving as we get those businesses up to the non-North America, non-Asia pest control margins.
Sorry, just the question about whether the IT costs are held at the-
The IT costs are largely what we tend to do is central development, so things like that connected device that you saw, that type of development we take centrally, but the deployment of systems tends to be booked into the country. So all the IT costs relating to North America are included in the North America cost pretty much as we deploy that through. So 90% of it, 89% of it will be in the American P&L.
Thanks.
Thanks. It is Sam Bland from JP Morgan. Two, please. First one was, I think you got about 10% share of the total U.S. pest market. Can you maybe just talk about what that might look like in a town or city where you have got the kind of density that you aim for that gives you the kind of margins you like? Are there any examples of cities in the U.S. where the city will be dominated by two or three very large players, so not so fragmented, and just give a feeling of what margins may look like in those cities where you are competing not against mom and pops, but some very large players. Thanks.
Thanks, Sam. I will deal with the first one, and John, maybe you can pick up the second. You cannot take this next statement to the bank, but there is a reasonably good read across between local market share and margin. I mean, it is not binary, but it is not at all uncommon if you have got 25%, 30% of a city market to have local operating margins of 25%, 30%. So, there are plenty of cities that we have. John showed you his bubble chart with a few areas where our density is good, areas like Heartland, Pennsylvania, where much of the company has been for decades. We will have some towns and cities there where we have got those sorts of local market shares and those sorts of margins. Similarly, we have got a few white spots where we have no penetration at all.
They may well be in the second question, who has got the market there. But last I checked, John, we have got nothing in Salt Lake City, Utah, for example. That will be a more challenging environment for us if we go in and open a branch and start from scratch, because then we have to win everything from competition. The typical model would be, can you find a really nice quality player to anchor your footprint in that city? In terms of, John, are there examples of some cities where you would typically see two or three of our bigger competitors as opposed to the regional guys, and you do not see much else? Can you cover that?
Great question. In the U.S., we have something called MSAs, Metropolitan Statistical Areas. If you just grabbed, let us say, the top 100 MSAs, and I think New York is number 1, L.A. is number 2, you get the kind of Chicago, Houston type thing, you would not typically see any one or two or three have commanding market shares. They are such large markets with such a diverse commercial need and residential need that there is going to be 40 very active players. But if you went into Google, you would find 240. No one has strong market shares in kind of the biggest markets. What we find is there is commanding market shares in those areas that are maybe like from size 200 up metropolitan statistical areas.
We have many of those where we might have 40% market share or 50% market share because we have been in that city since 1935, or someone else has been in that city for a very, very long time. So very diverse type market share structures. The big cities, there is lots of us fighting it out for, and we hold our average market share, if you will, for the nation in those. Then we have our All of us have these towns and counties where we have really good market share. I think the second part of the question, though, was about route density and how you make money. You do not have to have a commanding market share to make really good gross profits.
What you have to do is be above some sort of tipping point where the amount of time that you are spending with your people billing revenue is high enough that you really generate the kind of returns you want. As soon as you start doing that, you make great net margins. That is the reason why we One of the examples was taking a location that was, I think, $1 million, and we are going to buy another $1 million. Well, as soon as we get to $2 million, $3 million, $4 million, we have really just changed the dynamic of the business, even though that market might be a $30 million market, which would say we do not really have commanding market share, but we can really make good money as a result.
Tobias Prickel with Industrial Equity Partners. Earlier this morning, you spoke about the multinational and global business. I wanted to come back to it and ask how big is the business today, and how would you expect it to develop over, say, next three to five years?
Thanks. Yeah. I mean, this has been an interesting change, I would say, over recent years. I have been running Rentokil Pest Control now for eight years. Eight years ago, we had lots of business with multinational players in lots of countries. I do not think we had a single example of any global account. When we started to get into this, we were a little bit nervous as well because all of our businesses are run by emotional, passionate human beings, apart from the robots in finance. That was not meant to mean Jeremy, I am sorry. They were all reluctant to want to give up turf. To do a global deal, everyone has to come to the table, and everyone has to accept, "Well, if we do this deal, you are going to live with it." Someone would say, "I have got this amazingly good deal with this customer.
I do not want to do it." Over the last few years, that has changed quite a lot. What we have seen is global players operating around the world to their global standards. These are big companies, rather like us. We set our standards, which are way higher than the law, for how we run our business, and so do they. If you are in the emerging markets as a big food manufacturer, you are going to run that factory to the same global standards. Increasingly, they are finding it easier to say, "Hey, you do a great job for us in Nebraska, where we are based. Could you do this for us in New Delhi?" or whatever. I do not have a figure for how much today. I would say probably 20 million, something like that, revenues in that global account space. I think the pipeline is about $50 million.
What we do find, to my immense frustration, is we find it, I will not say easy, but we are finding it increasingly easy to win the global account, because the people at the corporate center say they want a global deal, and the procurement guys say they want a global deal. When that global deal gets taken out to 200 cities around the world, back to this human nature and turf and territory bit again, if you are running the plant in New Delhi, and we turn up with a piece of paper signed by your parent company saying, "Hey, we got a global deal," you may not want to play.
And so what we actually find is the people who struggle with global accounts more than anyone are actually the customers who struggle to force their own organizations to implement the very deal that they wanted to do in the first place. It is a trend. There is absolutely no doubt this is a trend. We have gone from that reactive position of, okay, when a customer asks us, we will put a proposition together. We are now being more proactive. We are saying, "Hey, we have got 25% of the global spend on pest control of this outfit. Why shouldn't we have 100%?" So we are now taking the discussion to them. So it is a trend, it is moving, it is increasing. It is without doubt the most difficult type of business to do.
But with our technology, increasingly, if you put myRentokil in, you can be sat in Nebraska and you can see the entire global estate of that organization, pest control trends going back over the last two, three years, hotspots, all manner of data. So that is really why the big guys are increasingly coming to us. As we have sort of labored the point, no one else can do that today.
Very interesting. Second question, if I may. On Vector Control, you have done a large acquisition last year, and now you seem to be able to hopefully win large business in Brazil organically. Wanted to ask, if you look out three, five years then again, do you believe in that large Vector Control market, you will do and need larger deals to really build out capability? Or from here, the journey will be more organic? Thank you.
Yeah. Excellent question. There are not a lot of big deals in terms of M&A out there. We have got, in securing that acquisition, we have actually picked up the number one in the U.S. market. It is a very niche activity. What is interesting, I think, this is the first time we have gone into pest control using airplanes. So this business basically uses a fleet, and John Myers almost wanted a corporate jet. He has now got a 25-year-old crop duster. But we have got a fleet of small aircraft which are designed to spray very large areas to get control of mosquitoes. So, that acquisition has given us a capability that we did not have, and to be honest, that very, very few people have got.
This is a team, we do not like to sort of prey on other people's problems, but when there are disasters around the world, very often following a typhoon or a hurricane or whatever in a hot, humid environment, following that will be an outbreak of malaria or yellow fever or whatever it happens to be. All of a sudden, you need an emergency response team to deal with that situation. So, actually, it is a really interesting piece of the business that we are just beginning to understand how can we use this skill, knowledge, expertise, which I would say maybe five companies around the world have got, and they are not big companies. How can we use that to go to other markets? So, I do think you are going to see it in markets like that in America. You are also going to see it in Africa.
You are going to see it in countries where they have got serious problems with things like malaria. So again, not one I think you can put in your model, not one that we are saying we know where the revenue is coming from, but the reason we bought that business was the capability that it brings. It is totally different. As Gary shared right at the beginning, we think the market is already a $3 billion market. If you think about how the world reacted to Zika when Zika turned up, nobody is talking about Zika anymore. By the way, Zika is not gone away, it is just we are not talking about it anymore. There will be other problems that come down the road, and there will be flashpoints and hotspots. So, I do not think our growth in that sector is going to come from more acquisitions, although there are a few out there.
It is going to come from taking the capability and figuring out how can we take that down to markets where they have got real problems.
Morning. Chris Bamberry, Peel Hunt. Going back to the targeted margins in North America, again, a 4% uplift in pest control. Just trying to get a better handle on the relative importance of the three factors you outlined. I mean, if we look at the organic drop-through, given you kind of talked about 1% of revenue goes 2% profit, that feels that is a pretty substantial part of that, maybe half of it. On the other hand, M&A, given you are constantly replenishing it with dilutive acquisitions, it feels in the shorter term, it is not going to be much benefit. Therefore, that would imply quite a substantial uplift from the Best of Breed program. If that is correct, can you kind of give me some comfort of evidence, kind of the applied scale of savings, just evidence for that coming through?
Yeah, I think it is mainly the drop-through from the organic. I think there is probably more M&A than you have intimated in your answer. M&A would be the second part, and Best of Breed would be the third part. But the Best of Breed, really, part of it is triangulating what we are able to achieve in other markets around the world where we have got the systems in place and where we have got the market share. Looking at our U.K. businesses, our more mature European businesses, the level of service efficiency we can look to, the level of procurement savings, we can cross-correlate those across and say those are absolutely deliverable parts of the margin piece. I would say Best of Breed is the lower part of the mix, but it is still pretty significant.
But that M&A, some of that is the spend we spent in 2017, then starting to flow through in 2018 and 2019 as we synergize that M&A. It is a mixture of the three. But as we look across to our other businesses and look across to our competitors as well in terms of what people like Rollins and ServiceMaster are able to achieve with their scale, because the other part in the Best of Breed is to scale on your head office, and that is the other part of the drop-through that you get.
Thank you.
Any more questions? I have a fear that lunch is getting warm, sitting opposite. Just see if there is any more questions. No? Fantastic. Thank you very much for coming. Thanks for your attention, your questions, and thanks to my co-presenters for the hard work today. Thank you all very much. We will see you on July the 31st for our results. Thank you very much.